Bergen Corporation has three divisions: pulp, paper, and fibers. Bergen's new controller, David Fisher, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2017: Pulp Paper Fibers
Revenues $19,600,000 $34,200,000 $51,000,000
Direct manufacturing costs 7,000,000 15,600,000 22,200,000
Division administrative costs 6,600,000 4,000,000 9,400,000
Division margin $ 6,000,000 $14,600,000 $19,400,000
Number of employees 600 300 1,100
Floor space (square feet) 106,400 70,680 202,920
Until now, Bergen Corporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Fisher 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 $ 4,600,000 Number of employees
Facility 6,400,000 Floor space (square feet)
Corporate administration 9,200,000 Division administrative costs
Total $ 20,200,000
Required:
1. Allocate 2017 fixed corporate-overhead costs to the three divisions using division margin as the alloca- tion base. What is each division's operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)?
2. Allocate 2017 fixed costs using the allocation bases suggested by Fisher. What is each division's oper- ating margin percentage under the new allocation scheme?
ASSIGNMENT MATERIAL
3. Compare and discuss the results of requirements 1 and 2. If division performance incentives are based on operating 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 Bergen Corporation use? Why? How might Fisher overcome any objec- tions that may arise from the divisions?