Chapter 22, Problem 1MCQ

To determine

Decentralization:

In order to organize and control the activities of an organization, the various types of activities are divided or departmentalized so that each activity can be keenly analyzed and their deviations from the budgets can be fixed. Also, it enables speedy decision making relating to a particular department. When the departments are divided the decision making authority is also divided and therefore speedy decisions can be taken for day to day operations without waiting for ultimate authorities to take part in every single activity or operation of the company.

Amount of advertising expense is allocated to appliances if allocation is based on departmental sales.

Explanation of Solution

Option b, $67,500 is correct.

Given,

Advertising expense for the year is $150,000.

Departmental sales for the year follows: house wares, $356,250; appliances, $641,250; and clothing, $427,500.

Formula to calculate advertisement expenses of appliance,

$\text{Advertisement}\text{expenses}\text{of}\text{appliances}=\left[\begin{array}{l}\left(\frac{\text{Advertisement}\text{expenses}}{\text{Total}\text{sales}\text{of}\text{all}\text{divisions}}\right)\\ \times \left(\text{Sale}\text{of}\text{appliance}\right)\end{array}\right]$

Substitute $150,000 for advertising expenses, $641,250 for sale of appliance and the sum of $356,250, $641,250 and $427,500 for total sales of all divisions.

$\begin{array}{c}\text{Advertisement}\text{expenses}\text{of}\text{appliances}=\left[\begin{array}{l}\left(\frac{\$150,000}{\left(\$356,250+\$641,250+\$427,500\right)}\right)\\ \times \left(\$641,250\right)\end{array}\right]\\ =\frac{\$150,000}{\$1,425,000}\times \$641,250\\ =\$67,500\end{array}$

Thus, amount of advertising expense allocated to appliance is $67,500 based on departmental sales.