Bethany Corporation has three divisions: pulp, paper, and fibers. Bethany's new controller, Paul Wagner, 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: Until now, BethanyCorporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Wagner asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases: Read the requirements3. Requirement 1. Allocate 2017fixed corporate-overhead costs to the three divisions using division margin as the allocation base. What is each division's operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)? Allocate the fixed corporate-overhead costs, then calculate the division operating margins in dollars and as a percentage of revenue. (Round allocation proportions to one decimal place, X.X%, and dollar amounts to the nearest dollar. Enter operating margin percentages to one decimal, X.X%.) Pulp Paper Fibers Division margin $3,000,000 $7,300,000 $9,700,000 Allocated fixed corporate-overhead Operating margin Operating margin % % % % Requirement 2. Allocate 2017 fixed costs using the allocation bases suggested by Wagner. What is each division's operating margin percentage under the new allocation scheme? Allocate the fixed corporate-overhead costs, then calculate the division operating margins in dollars and as a percentage of revenue. (Round allocation proportions to one decimal place, X.X%, and dollar amounts to the nearest dollar. Round the operating margin percentages to one decimal, X.X%. Use parentheses or a minus sign for negative amounts.) Pulp Paper Fibers Division margin $3,000,000 $7,300,000 $9,700,000 Allocated fixed corporate-overhead costs: Human resource management Facility Corporate administration Operating margin Operating margin % % % % Requirement 3. Compare and discuss the results of requirements 1 and 2. If division performance incentives are based on operating margin percentage, which division would be most receptive to the new allocation scheme? Which division would be the least receptive? Why? When corporate overhead is allocated to the divisions on the basis of division margins (requirement 1), (1) are (is) profitable and the (2) division is the most profitable while the (3) division is the least profitable. When Wagner's suggested bases are used to allocate the different types of corporate overhead costs (requirement 2), the (4) division is not profitable and the (5) division is the most profitable. If division performance is linked to operating margin percentages, (6) will resist this new way of allocating corporate costs, which causes its operating margin to (7) (8) will welcome the change—its operating margin percentage rises the most. Requirement 4. Which allocation scheme should Bethany Corporation use? Why? How might Wagner overcome any objections that may arise from the divisions? The (9) is preferable because it is based on cause-and-effect relationships between costs and their respective cost drivers in the long run. To overcome objections from the divisions, Wagner may (10) corporate overhead to divisions when evaluating performance. 1: Data Table Pulp Paper Fibers Revenues $9,900,000 $17,700,000 $25,300,000 Direct manufacturing costs 3,700,000 8,400,000 10,800,000 Division administrative costs 3,200,000 2,000,000 4,800,000 Division margin $3,000,000 $7,300,000 $9,700,000 Number of employees $525 $225 $750 Floor space (square feet) $39,200 $25,760 $75,040 2: Data Table Fixed Corporate-Overhead Costs Suggested Allocation Bases Human resource management $2,200,000 Number of employees Facility 3,300,000 Floor space (square feet) Corporate administration 5,000,000 Division administrative costs Total $10,500,000 3: Requirements 1. Allocate 2017fixed corporate-overhead costs to the three divisions using division margin as the allocation base. What is each division's operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)? 2. Allocate 2017fixed costs using the allocation bases suggested by Wagner. What is each division's operating margin percentage under the new allocation scheme? 3. Compare and discuss the results of requirements 1 and 2. If division performance incentives are based on operating margin percentage, which division would be most receptive to the new allocation scheme? Which division would be the least receptive? Why?

Bethany Corporation has three divisions: pulp, paper, and fibers. Bethany's new controller, Paul Wagner, 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: Until now, BethanyCorporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Wagner asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases: Read the requirements3. Requirement 1. Allocate 2017fixed corporate-overhead costs to the three divisions using division margin as the allocation base. What is each division's operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)? Allocate the fixed corporate-overhead costs, then calculate the division operating margins in dollars and as a percentage of revenue. (Round allocation proportions to one decimal place, X.X%, and dollar amounts to the nearest dollar. Enter operating margin percentages to one decimal, X.X%.) Pulp Paper Fibers Division margin $3,000,000 $7,300,000 $9,700,000 Allocated fixed corporate-overhead Operating margin Operating margin % % % % Requirement 2. Allocate 2017 fixed costs using the allocation bases suggested by Wagner. What is each division's operating margin percentage under the new allocation scheme? Allocate the fixed corporate-overhead costs, then calculate the division operating margins in dollars and as a percentage of revenue. (Round allocation proportions to one decimal place, X.X%, and dollar amounts to the nearest dollar. Round the operating margin percentages to one decimal, X.X%. Use parentheses or a minus sign for negative amounts.) Pulp Paper Fibers Division margin $3,000,000 $7,300,000 $9,700,000 Allocated fixed corporate-overhead costs: Human resource management Facility Corporate administration Operating margin Operating margin % % % % Requirement 3. Compare and discuss the results of requirements 1 and 2. If division performance incentives are based on operating margin percentage, which division would be most receptive to the new allocation scheme? Which division would be the least receptive? Why? When corporate overhead is allocated to the divisions on the basis of division margins (requirement 1), (1) are (is) profitable and the (2) division is the most profitable while the (3) division is the least profitable. When Wagner's suggested bases are used to allocate the different types of corporate overhead costs (requirement 2), the (4) division is not profitable and the (5) division is the most profitable. If division performance is linked to operating margin percentages, (6) will resist this new way of allocating corporate costs, which causes its operating margin to (7) (8) will welcome the change—its operating margin percentage rises the most. Requirement 4. Which allocation scheme should Bethany Corporation use? Why? How might Wagner overcome any objections that may arise from the divisions? The (9) is preferable because it is based on cause-and-effect relationships between costs and their respective cost drivers in the long run. To overcome objections from the divisions, Wagner may (10) corporate overhead to divisions when evaluating performance. 1: Data Table Pulp Paper Fibers Revenues $9,900,000 $17,700,000 $25,300,000 Direct manufacturing costs 3,700,000 8,400,000 10,800,000 Division administrative costs 3,200,000 2,000,000 4,800,000 Division margin $3,000,000 $7,300,000 $9,700,000 Number of employees $525 $225 $750 Floor space (square feet) $39,200 $25,760 $75,040 2: Data Table Fixed Corporate-Overhead Costs Suggested Allocation Bases Human resource management $2,200,000 Number of employees Facility 3,300,000 Floor space (square feet) Corporate administration 5,000,000 Division administrative costs Total $10,500,000 3: Requirements 1. Allocate 2017fixed corporate-overhead costs to the three divisions using division margin as the allocation base. What is each division's operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)? 2. Allocate 2017fixed costs using the allocation bases suggested by Wagner. What is each division's operating margin percentage under the new allocation scheme? 3. Compare and discuss the results of requirements 1 and 2. If division performance incentives are based on operating margin percentage, which division would be most receptive to the new allocation scheme? Which division would be the least receptive? Why?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Bethany Corporation has three divisions: pulp, paper, and fibers. Bethany's

new controller, Paul Wagner, 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:

Until now, BethanyCorporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Wagner asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases:

Read the requirements3.

Requirement 1. Allocate 2017fixed corporate-overhead costs to the three divisions using division margin as the allocation base. What is each division's operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)?

Allocate the fixed corporate-overhead costs, then calculate the division operating margins in dollars and as a percentage of revenue. (Round allocation proportions to one decimal place, X.X%, and dollar amounts to the nearest dollar. Enter operating margin percentages to one decimal, X.X%.)

	Pulp	Paper	Fibers
Division margin	$3,000,000		$7,300,000		$9,700,000
Allocated fixed corporate-overhead
Operating margin
Operating margin %		%		%		%

Requirement 2. Allocate 2017 fixed costs using the allocation bases suggested by Wagner. What is each division's operating margin percentage under the new allocation scheme?

Allocate the fixed corporate-overhead costs, then calculate the division operating margins in dollars and as a percentage of revenue. (Round allocation proportions to one decimal place, X.X%, and dollar amounts to the nearest dollar. Round the operating margin percentages to one decimal, X.X%. Use parentheses or a minus sign for negative amounts.)

	Pulp	Paper	Fibers
Division margin	$3,000,000		$7,300,000		$9,700,000
Allocated fixed corporate-overhead costs:
Human resource management
Facility
Corporate administration
Operating margin
Operating margin %		%		%		%

Requirement 3. Compare and discuss the results of requirements 1 and 2. If division performance incentives are based on operating margin percentage, which division would be most receptive to the new allocation scheme? Which division would be the least receptive? Why?

When corporate overhead is allocated to the divisions on the basis of division margins (requirement 1),

(1) are (is) profitable and the (2)

division is the most profitable while the

(3) division is the least profitable. When Wagner's suggested bases are used to allocate the different types of corporate overhead costs (requirement 2), the (4) division is not profitable and the

(5) division is the most profitable.

If division performance is linked to operating margin percentages,

(6) will resist this new way of allocating corporate costs, which causes its operating margin to (7) (8)

will welcome the change—its operating margin percentage rises the most.

Requirement 4. Which allocation scheme should

Bethany Corporation use? Why? How might Wagner

overcome any objections that may arise from the divisions?

The (9) is preferable because it is based on cause-and-effect relationships between costs and their respective cost drivers in the long run. To overcome objections from the divisions, Wagner may

(10) corporate overhead to divisions when evaluating performance.

1: Data Table

	Pulp	Paper	Fibers
Revenues	$9,900,000	$17,700,000	$25,300,000
Direct manufacturing costs	3,700,000	8,400,000	10,800,000
Division administrative costs	3,200,000	2,000,000	4,800,000
Division margin	$3,000,000	$7,300,000	$9,700,000
Number of employees	$525	$225	$750
Floor space (square feet)	$39,200	$25,760	$75,040

2: Data Table

Fixed Corporate-Overhead Costs	Suggested Allocation Bases
Human resource management	$2,200,000	Number of employees
Facility	3,300,000	Floor space (square feet)
Corporate administration	5,000,000	Division administrative costs
Total	$10,500,000

3: Requirements

1.	Allocate 2017fixed corporate-overhead costs to the three divisions using division margin as the allocation base. What is each division's operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)?
2.	Allocate 2017fixed costs using the allocation bases suggested by Wagner. What is each division's operating margin percentage under the new allocation scheme?
3.	Compare and discuss the results of requirements 1 and 2. If division performance incentives are based on operating margin percentage, which division would be most receptive to the new allocation scheme? Which division would be the least receptive? Why?
4.	Which allocation scheme should BethanyCorporation use? Why? How might Wagner overcome any objections that may arise from the divisions?

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