Question

WASHINGTON CORPORATION

…… is a decentralized operation with 4 operating divisions: Chairs, Microwaves, Shoes & Widgets.

As controller of NAPOLEON, you are preparing a divisional performance presentation to senior management. Summary figures for the four divisions for the most recent years are as follows (in millions):

	Chairs	Microwaves	Shoes	Widgets	Total
Revenues	$    8,000	$       16,000	$   4,800	$ 3,200	$ 32,000
Operating costs	3,000	15,000	3,800	3,500	$ 25,300
Operating Income	$    5,000	$         1,000	$   1,000	$ (300)	$   6,700
Identifiable assets	$ 14,000	$         6,000	$   3,000	$ 2,000	$ 25,000
Number of employees	9,000	12,000	6,000	3,000	30,000

The company currently allocates is common corporate costs to each division using a single cost pool based on revenues. For the most recent year, these costs totaled $3,200 (in millions). The divisional managers all share in a bonus pool based on “division income”. For this purpose, “division income” is calculated as operating income minus allocated corporate costs.

There has been some negative feedback and grumblings about the current allocation system, and so you have suggested a revised system which would break these corporate costs into 4 separate pools, with allocation bases as shown below:

Corporate Cost Category			Amount	Cost Pool	Allocation Base
Interest - debt			$    2,000	Cost pool 1	Identifiable assets
Corporate salaries			150	Cost pool 2	Division revenues
Accounting and control			110	Cost pool 2	Division revenues
General marketing			200	Cost pool 2	Division revenues
Legal			140	Cost pool 2	Division revenues
Research & development			200	Cost pool 2	Division revenues
Public affairs			200	Cost pool 3	Positive operating income
Personnel and payroll			200	Cost pool 4	Number of employees
Total			$    3,200

REQUIRED:

1. Calculate the “division income” for each business unit based on the existing allocation method.

2. Calculate the “division income” for each business unit using the new activity-based system suggested.

3. Which division manager do you think had the biggest problem with the existing allocation scheme? WHY?

4. How do you think the new proposed system will be received by the division managers?

5. What are the strengths and weaknesses of this new system versus the existing single-pool method? What can be done to the new system to make it even better?

Answer 1