Question

Viking Insurance Advisory Group The Viking Group is an insurance advisory and broker firm primarily specializing in company clients from the maritime and offshore industry as well as high-income private clients in Western Norway. Viking has offices in Haugesund, Stord, and Bergen. Operating as a profit center, each office receives central services, including information technology, marketing, accounting, and payroll. Viking has 23 insurance advisors/brokers, 8 each in Haugesund and Stord, and 7 in Bergen. Each insurance advisor/broker is paid a fixed salary, a commission based on the revenue generated from clients, plus 3 percent of regional office profits and 1 percent of firm profits. One of the senior insurance advisors/brokers in each office is designated as the office manager and is responsible for running the office. The office manager receives 9 percent of the regional office profits instead of 3 percent. Regional office expenses include commissions paid to insurance advisors and brokers.

The following regional profits are calculated before the 3 percent profit sharing. Firm profits are the sum of the three regional office profits. This table summarizes the current profits per office after allocating central service costs based on office revenues.

                                                                      VIKING GROUP Profits by Office Current Year (Millions NOK)

                                            Haugesund            Stord                     Bergen

                       Revenue      550,00              530,00                      590,00

       Operating expenses        -256,70               -242,00                 -293,00

          Central services*         -22,72                      -21,90                   -24,38

                    Profit                   270,58                   266,10                        272,62

*Allocated on the basis of revenue.

The manager of the Bergen office sent the following e-mail to the other office managers, the president, and the chief financial officer:

One of the primary criteria by which all cost allocation schemes are to be judged is fairness. The costs allocated to those bearing them should view the system as fair. Our current system, which allocates central services using office revenues, fails this important test of fairness. Receiving more allocated costs penalizes those offices generating more revenues. A fairer, and hence more defensible, system would be to allocate these central services based on the number of insurance advisors/brokers in each office.

Required: a. Recalculate each office’s profits before any profit sharing assuming the Bergen manager’s proposal is adopted.

b. Do you believe the Bergen manager’s proposal results in a fairer allocation scheme than the current one? Why or why not?

c. Why is the Bergen manager concerned about fairness? How much will his proposal influence his profit share?

d. What is your proposal for a fair solution?

Answer 1

a)
	Ghaugesund	Stord	Bergen
Revenue	550,00	530,00	590,00
Less: operating expenses	256,70	242,00	293,00
Less: central services	24,00	24,00	21,00	(8:8:7 of 69,00)
Profit before profit sharing	269,30	264,00	276,00

b) No, the Bergen Manager's proposal would not be

a fairer allocation scheme because the central services

includes IT, marketing, accounting & payroll which do

not have relation with the advisor/broker each region

have. Each region able to increase their revenue only

by using more either of the central services irrespective

of number of advisor/broker they have.

c) The Bergen manager is concerned about fairness because

according to manager, region achieving higher revenue is

rewarding negatively through charging higher central services

costs.

The proposal of the Bergen manager influences alot his profit

sharing as his region's profit before Profit sharing has increased

from 272,62 to 276,00. He would receive profit share of 24,84

instead of 24,54.

d) The current scheme of allocating the central services on the

basis of revenue is the fair allocation because all the services

provided through central office have direct link with the

revenues of each regional office.