Chapter 26, Problem 26.17EX

Evaluating selling and administrative cost allocations

Gordon Gecco Furniture Company has two major product lines with the following characteristics:

• Commercial office furniture: Few large orders, little advertising support, shipments in full truckloads, and low handling complexity

• Home office furniture: Many small orders, large advertising support, shipments in partial truckloads, and high handling complexity

The company produced the following profitability report for management:

The selling and administrative expenses are allocated to the products on the basis of relative sales dollars.

Evaluate the accuracy of this report and recommend an alternative approach.