Question

Go Camera manufactures and sells two types of cameras for cars and drones. These two models are manufactured in separate facilities and each facility is treated as profit center. Go Camera serves as a supplier to car manufacturers as well as drone manufacturers. The following table provides cost and price information for each model:

	Car Camera	Drone Camera
Selling Price	$70	$100
Variable Cost	$30	$35
Fixed Cost	$300,000	$ 600,000

Go Camera has a marketing department with cost $400,000 which needs to be allocated to the two profit centers, Car Camera and Drone Camera. The cost allocation can be done by two ways, 30:70 (Car gets 30% and Drone gets 70%) or based on profits. The projected sales in units are 10,000 for car and 15,000 for Drones respectively.

(a) Determine the segmented expected profits for Car camera as well as for Drone camera after allocating the marketing department cost using a 30:70 allocation rule.

(b) Determine the segmented expected profits for Car camera as well as for Drone camera after allocating the marketing department cost using the profit (before marketing cost) based allocation rule.

(c) Comment on the segmented profits computed in (a) and (b).

(d) Go Camera is planning to add another facility for manufacturing under-water cameras. This product can be useful for diving, swimming, other under-water related activities. The projected selling price and variable cost for under-water camera are $150 and $70 respectively. The projected fixed cost for this facility is $860,000 and projected sales in units are 12,000. Assuming the marketing department cost at $400,000, determine the profits for the three different camera-departments after allocating the marketing cost using projected profits (before the marketing cost).

Answer 1

a) Distribution using 30:70 allocation rule:-

Particulars	Car Camera	Drone Camera
Selling Price	70	100
Variable Cost	30	35
Contribution per unit	40	65
Sales units	10000	15000
Total Contribution	400,000	975,000
Fixed Cost	300,000	600,000
Marketing Dept Cost	120,000 (400,000*0.3)	280,000 (400,000*0.7)
Profit/(Loss)	(20,000)	95,000

b) Distribution using profit based allocation rule:-

Particulars	Car Camera	Drone Camera
Total Contribution	400,000	975,000
Fixed Cost	300,000	600,000
Profit before marketing cost	100,000	375,000
Marketing cost (100:375)	84,210.53	315,789.47
Profit/(Loss)	15,789.47	59,210.53

c) If we make allocation based on 30:70 rule, car camera segment gets loss. If we make allocation using the profit before marketing cost based allocation, both the segment gets profit.

Although the total profit is same under both the cases, allocating marketing cost based on the profit before marketing cost is better.

d) Profit before marketing cost for Under water cameras,

= 12,000 (80) (150-70) - 860,000

= $100,000

Particulars	Car	Drone	Under-water
Profit before marketing cost	100,000	375,000	100,000
Marketing cost (100:375:100)	69,565.22	260,869.56	69,565.22
Net Profit	30,434.78	114,130.44	30,434.78