Describe how companies are increasingly facing revenue-allocation decisions.
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Sportz, Inc., manufactures athletic shoes and athletic clothing for both amateur and professional athletes. The company has two product lines (clothing and shoes), which are produced in separate manufacturing facilities; however, both manufacturing facilities share the same support services for information technology and human resources. The following shows costs (in thousands) for each manufacturing facility and for each support department. The total costs of the support departments (IT and HR) are allocated to the production departments (clothing and shoes) using a single rate based on the following: Data on the bases, by department, are given as follows: 1\. What are the total costs of the production departments (clothing and shoes) after the support-department costs of information technology and human resources have been allocated using (a) the direct method, (b) the step-down method (allocate information technology first), (c) the step-down method (allocate human resources first), and (d) the reciprocal method? 2\. Assume that all of the work of the IT department could be outsourced to an independent company for \(\$ 97.50\) per hour. If Sportz no longer operated its own IT department, \(30 \%\) of the fixed costs of the IT department could be eliminated. Should Sportz outsource its IT services?
Jim Dandy Auto Sales uses all types of media to advertise its products (television, radio, newspaper, Internet, and so on). At the end of 2016 , the company president, Jim McKinnley, decided that all advertising costs would be incurred by corporate headquarters and allocated to each of the company's four sales locations based on number of vehicles sold. Jim was confident that his corporate purchasing manager could negotiate better advertising contracts on a corporate-wide basis than each of the sales managers could on their own. McKinnley budgeted total advertising cost for 2017 to be \(\$ 1.6\) million. He introduced the new plan to his sales managers just before the New Year. The managers had already drawn up their advertising plans for 2017 and the corporate plan would do the same advertising for them as they had planned. Total advertising costs for 2017 were \(\$ 1,600,000\). If the managers had done this same advertising on their own, their advertising costs would be as follows: The manager of the East sales location, Tom Stevens, was not happy. He complained that the new allocation method was unfair and increased his advertising costs significantly. The East location sold high volumes of low- priced used cars and most of the corporate advertising budget was related to new car sales. 1\. Show the amount of the 2017 advertising cost \((\$ 1,600,000)\) that would be allocated to each of the divisions under the following criteria: a. McKinnley's allocation method based on number of cars sold b. The stand-alone method if divisions had done their own advertising c. The incremental-allocation method, with divisions ranked on the basis of dollars they would have spent on advertising in 2017 2\. Which method do you think is most equitable to the divisional sales managers? What other options might President Jim McKinnley have for allocating the advertising costs?
Distinguish between the single-rate and the dual-rate methods.
Evan and Brett are students at Berkeley College. They share an apartment that is owned by Brett. Brett is considering subscribing to an Internet provider that has the following packages available: Evan spends most of his time on the Internet ("everything can be found online now"). Brett prefers to spend his time talking on the phone rather than using the Internet ("going online is a waste of time"). They agree that the purchase of the \(\$ 90\) total package is a "win-win" situation. 1\. Allocate the \(\$ 90\) between Evan and Brett using (a) the stand-alone cost-allocation method, (b) the incremental cost-allocation method, and (c) the Shapley value method. 2\. Which method would you recommend they use and why?
What are the challenges of using the incremental cost allocation method when allocating common costs and how might they be overcome?
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