Allocation of common costs. 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 condent 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 $1,600,000. If the managers had done thissame advertising on their own, their advertising costs would be as follows: Actual Number of CarsAdvertising Costs in 2017 if DivisionsHad Bought the Advertising$ 279,500Sales LocationSold in 2017East5,600West1,440473,000North3,200580,500South5,760817,00016,000$2,150,000The manager of the East sales location, Tom Stevens, was not happy. He complained that the new allocationmethod was unfair and increased his advertising costs significantly. The East location sold high volumes oflow-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 divi-sions under the following criteria:a. McKinnley's allocation method based on number of cars soldb. The stand-alone method if divisions had done their own advertisingc. The incremental-allocation method, with divisions ranked on the basis of dollars they would havespent on advertising in 20172. Which method do you think is most equitable to the divisional sales managers? What other optionsmight President Jim McKinnley have for allocating the advertising costs?Required

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Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter7: Variable Costing For Management analysis

Section: Chapter Questions

Problem 1TIF

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Allocation of common costs. 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 condent 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:

Actual Number of Cars
Advertising Costs in 2017 if Divisions
Had Bought the Advertising
$ 279,500
Sales Location
Sold in 2017
East
5,600
West
1,440
473,000
North
3,200
580,500
South
5,760
817,000
16,000
$2,150,000
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 divi-
sions 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?
Required

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