Chapter 14, Problem 14.37P

Cost-hierarchy income statement and allocation of corporate, division, and channel costs to customers. Vocal Speakers makes wireless speakers that are sold to different customers in two main distribution channels. Recently, the company’s profitability has decreased. Management would like to analyze the profitability of each channel based on the following information:

The company allocates distribution channel costs of marketing and administration as follows:

	Total	Allocation basis
Distribution-channel costs
Marketing costs	$260,000	Channel revenue
Administration costs	$200,000	Customer-level costs

Based on a special study, the company allocates corporate costs to the two channels based on the corporate resources demanded by the channels as follows: Distribution Channel A, $45,000, and Distribution Channel B, $55,000. If the company were to close a distribution channel, none of the corporate costs would be saved.

1. 1. Calculate the operating income for each distribution channel as a percentage of revenue after assigning customer-level costs, distribution-channel costs, and corporate costs.

Required

1. 2. Should Vocal Speakers close down any distribution channel? Explain briefly including any assumptions that you made.
2. 3. Would you allocate corporate costs to divisions? Why is allocating these costs helpful? What actions would it help you take?