Reference no: EM132690692

Problem - Evaluating Selling and Administrative Cost Allocations

Empire 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:

Office Comfort Furniture Company Product Profitability Report For the Year Ended December 31, 2012
	Commercial Office Furniture	Home Office Furniture	Total
Revenue	$4,000,000	$2,000,000	$6,000,000
Cost of goods sold	1,500,000	700,000	2,200,000
Gross profit	$2,500,000	$1,300,000	$3,800,000
Selling and administrative expenses	1,200,000	600,000	1,800,000
Income from operations	$1,300,000	$ 700,000	$2,000,000

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.