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Allocation of Marketing and Administrative Costs; Profit SBUs Tilton Academy allocates market- ing and administrative costs to its three schools based on total annual tuition revenue for the schools. In 2009 the allocations (000s omitted) were as follows:
Lower School
Middle School
Upper School
Total
Tuition revenue
$1,500
$500
$2,000
$4,000
Marketing and administration
375
125
500
$1,000
In 2010, the middle and upper schools experienced no change in revenues, but the lower school's tuition revenue increased to $1.9 million. Marketing and administrative costs rose to $1,250,000.
Required
1. Using revenue as an allocation base, how should the costs be allocated for 2010?
2. What are the shortcomings of this allocation formula?
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