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
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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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