Reference no: EM13861931

Cost allocation to divisions. Holbrook Corporation has three divisions: pulp, paper, and fibers. Holbrook's new controller, Paul Weber, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2013:

	Pulp	Paper	Fibers
Revenues	$ 9,800,00	$17,100,000	$25,500,000
Direct manufacturing costs	3,500,000	7,800,000	11,100,000
Division administrative costs	3,300,000	2,000,000	4,700,000
Division margin	$3,000,000	$ 7,300,000	9,700,000
Number of employees	300	150	550
Floor space (square feet)	53,200	35,340	101,460

Until now, Holbrook Corporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Weber asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases:

Fixed Corporate Overhead Costs		Suggested Allocation Bases
Human resource management	$ 2,300,000	Number of employees
Facility	3,200,000	Floor space (square feet)
Corporate administration	4,600,000	Division administrative costs
Total	$10,100,000

1. Allocate 2013 fixed corporate-overhead costs to the three divisions using division margin as the allocation base. What is each division's operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)?

2. Allocate 2013 fixed costs using the allocation bases suggested by Weber. What is each division's operating margin percentage under the new allocation scheme?

3. Compare and discuss the results of requirements 1 and 2. If division performance is linked to operat¬ing margin percentage, which division would be most receptive to the new allocation scheme? Which division would be the least receptive? Why?

4. Which allocation scheme should Holbrook Corporation use? Why? How might Weber overcome any objections that may arise from the divisions?