Question

How would you respond to the following scenario:

1) A company has two major businesses that it operates. One business manufactures and sells unicycles for commercial use in circuses, etc. (total sales of $150M), and the other sells bicycles to the public (total sales of $20M). The unicycle business occupies 75,000 square feet of the manufacturing warehouse and the bicycle business occupies the remaining 25,000 square feet. Cost were split 50-50 between the 2 businesses for advertising (total advertising expense of $5M) and warehouse expense (total warehouse expense of $3M) in the past (traditional method).

2)What recommendation would you make in allocating these expenses to each of the business and how much would be How would you respond to the following scenario:

1)A company has two major businesses that it operates. One business manufactures and sells unicycles for commercial use in circuses, etc. (total sales of $150M), and the other sells bicycles to the public (total sales of $20M). The unicycle business occupies 75,000 square feet of the manufacturing warehouse and the bicycle business occupies the remaining 25,000 square feet. Cost were split 50-50 between the 2 businesses for advertising (total advertising expense of $5M) and warehouse expense (total warehouse expense of $3M) in the past (traditional method).

2)What recommendation would you make in allocating these expenses to each of the business and how much would be allocated to each business?

Two part question
 

Answer 1

Recommendation: The common costs such as advertising and warehouse expense should be allocated to the two business segments by using a proper allocation base which drives the respective cost. Thus, advertising cost may be allocated based on the total sales of each business while the warehouse expense may be allocated based on the square footage of space occupied by each business.

	Allocation Base		Total Cost $	Unicycles		Bicycles
	Driver	Total usage		Base	Allocated Cost $	Base	Allocated Cost $
Advertising	Sales	170M	5000000	150M	4411765	20M	588235
Warehouse expense	Square feet	100000	3000000	75000	2250000	25000	750000