Question

Questions 32-33 use the information that follows.

Argentina Corporation has three divisions: Pulp, Paper, and Fibers. Argentina’s new controller, David Fisher, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2017:

	Pulp	Paper	Fiber
Revenues	$19,600	$34,200	$51,000
Direct manufacturing costs	7000	15,600	22,200
Division administrative costs	6600	4000	9400
Division margin	$6000	$14,600	$19,400
Number of employees	150	75	275
Floor space (sq. ft.)	26,600	17,670	50,730

Argentina Corporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Fisher asks for a list of costs that compromise fixed corporate overhead and suggests the following new allocation bases:

fixed corporate-overhead costs		suggested allocation bases
human resource management	$4,600	number of employees
facility	6,400	floor space (sq. ft.)
corporate administration	9,200	division administrative costs
total	$20,200

32. Allocate 2017 fixed-corporate overhead costs to the three divisions using division margin as the allocation base. What is each division’ operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)?

33. Allocate 2017 fixed costs using the allocation bases suggested by Fisher. What is each division’s operating margin percentage under the new allocation scheme?

Thanks

Answer 1

(1)

	Pulp	Paper	Fibres
Percentage Margin	(6000/40000) =15%	(14600/40000) =36.5%	(19400/40000) =48.5%
Employees	(150/500) =30%	(75/500) =15%	(275/500) =55%
Floor Space	(26600/95000) =28%	((17670/95000) =18.60%	(50730/95000) =53.40%
Adm Office	(6600/20000) =33%	(4000/20000) =20%	(9400/20000) =47%

	Pulp	Paper	Fibres	Total
Division Margin	6000	14600	19400	40000
O/H allocated	(20200 * 15%) =3030	(20200 * 36.5%) =7373	(20200 * 48.5%) =9797	20200
Operation Margin	2970	7227	9603	19800
Revenue	19600	34200	51000	104800
Revenue %	15.15%	21.13%	18.83%	18.89%

(2)

	Pulp	Paper	Fibres	Total
Division Margin	6000	14600	19400	40000
Human resource management	(4600 * 30%) =1380	(4600 * 15%) =690	(4600*55%) =2530	4600
Facility Costs	(6400 * 28%) =1792	(6400 * 18.60%) =1190.40	(6400*53.40%) =3417.60	6400
Corp Admin	(9200 * 33%) =3036	(9200 * 20%) =1840	(9200 * 47%) =4324	9200
Corp O/H Allocated	6208	3720.40	10271.60	20200
Operating Margin	(208)	10879.60	9128.4	19800
Revenue	19600	34200	51000	104800
Revenue %	-1.06%	31.81%	17.90%	18.89%