Reference no: EM132648813

The Kiddo Company manufactures and ships children's stuffed animals across the nation. The following are profit statements for the company's two lines of business:

                                       Stock Stuffed Animals                   Custom Stuffed Animals
Sales                                 $7,500,000                               $5,000,000
Less direct costs                 2,500,000                                    4,000,000
Less allocated costs               3,375,000                                   1,125,000
Income (loss) before taxes         $1,625,000                             ($ 125,000)

Costs that are easily associated with each line of business are included in the direct costs. Allocated costs include costs that are not directly traced to the business units. These costs include employee benefits, rent, telecommunications costs, and general and administrative costs, such as the salary of the CEO of Kiddo.

At the start of 2017, allocated costs were estimated as follows:

Employee benefits                     $1,500,000
Rent                                        1,500,000
Telecommunications                   500,000
General and administrative costs  1,000,000
Total                                       $4,500,000

In the past, allocations have been based on headcount (the number of employees in each business unit). There were 240 employees in Stock and 80 employees in Custom. The new controller of Kiddo believes that the key driver of employee benefits and telecommunications costs is headcount. However, rent is driven by space occupied, and general and administrative costs are driven by relative sales. Kiddo rents 20,000 square feet; approximately 10,000 is occupied by Stock employees and 10,000 by Custom personnel.

REQUIRED

Question 1: Prepare profit reports for Stock and Custom, assuming the company allocates costs using headcount, space occupied, and sales as allocation bases. Compare the new levels of profit to the levels that result using a single allocation base (headcount). Round to two decimal places.

Question 2: Which provides the best information on profitability: a single overhead cost pool with headcount as the allocation base, or multiple cost pools using headcount, sales, and space occupied?