Chapter 14, Problem 14.22E

Cost allocation and decision making. Reidland Manufacturing has four divisions: Acme, Dune, Stark, and Brothers. Corporate headquarters is in Minnesota. Reidland corporate headquarters incurs costs of $16,800,000 per period, which is an indirect cost of the divisions. Corporate headquarters currently allocates this cost to the divisions based on the revenues of each division. The CEO has asked each division manager to suggest an allocation base for the indirect headquarters costs from among revenues, segment margin, direct costs, and number of employees. The following is relevant information about each division:

1. 1. Allocate the indirect headquarters costs of Reidland Manufacturing to each of the four divisions using revenues, direct costs, segment margin, and number of employees as the allocation bases. Calculate operating margins for each division after allocating headquarters costs.
2. 2. Flair ranks the individual customers in the Ma and Pa single-store distribution market on the basis of monthly operating income. The cumulative operating income of the top 20% of customers is $58,120. Best Drugs reports operating losses of $23,670 for the bottom 40% of its customers. Make four recommendations that you think Best Drugs should consider in light of this new customer-profitability information.