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Holbrook Corporation has three divisions: pulp, paper, and fibers. Holbrook's new controller, Stefan Mayer, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2012:

(Click the icon to view the information.)

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

(Click the icon to view the fixed corporate overhead and new allocation bases.) Read the requirements.

Requirement 1. Allocate 2012 fixed corporate-overhead costs to the three divisions using division margi the allocation base. What is each division's operating margin percentage (division margin minus allocatec fixed corporate-overhead costs as a percentage of revenues)?

Allocate the fixed corporate-overhead costs, then calculate the division operating margins in dollars and percentage of revenue. (Round allocation proportions to one decimal place, X.X%, and dollar amounts to nearest dollar. Enter operating margin percentages to one decimal, X.X%.)

Pulp Paper Fibers

Division margin $ 2,300,000 $ 7,200,000 $ 10,500,000 Allocated fixed corporate-overhead I I I I Operating margin I I I I I

Operating margin % I % I I % I I %

Requirement 2. Allocate 2012 fixed costs using the allocation bases suggested by Mayer. What is each division's operating margin percentage under the new allocation scheme?

Allocate the fixed corporate-overhead costs, then calculate the division operating margins in dollars and < percentage of revenue. (Round allocation proportions to one decimal place, X.X%, and dollar amounts to nearest dollar. Round the operating margin percentages to one decimal, X.X%. Use parentheses or a mi1 sign for negative amounts.)

Division margin

Allocated fixed corporate-overhead costs: Human resource management

Facility

Corporate administration Operating margin

Operating margin %

Pulp Paper Fibers

$ 2,300,000 $ 7,200,000 $ 10,500,000

%

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

2.

(cont.)

When corporate overhead is allocated to the divisions on the basis of division margins (requirement 1),

Fibers Paper Pulp

each division

the Paper and Fibers divisions the Pulp and Paper divisions the Pulp and Fibers divisions

are (is) profitable and the

division is the most profitable while

Fibers Paper Pulp

division is the least profitable. When Mayer's suggested bases are used to allocate the different

types of corporate overhead costs (requirement 2), the

division is the most profitable.

Fibers Paper Pulp

Fibers Paper Pulp

division is not profitable and the

Fibers Paper Pulp

If division performance is linked to operating margin percentages, will resist this new way of

allocating corporate costs, which causes its operating margin to

decrease to a loss (negative operating margin). increase significantly.

Fibers Paper Pulp

will welcome the change-its operating marg

percentage rises the most.

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

The

new approach old approach

is preferable because it is based on cause-and-effect relationships between costs a

their respective cost drivers in the long run. To overcome objections from the divisions, Mayer may

initially choose not to allocate just begin allocating

corporate overhead to divisions when evaluating performance.

Data Table

2.Pulp Paper Fibers

(cont.) Revenues $ 9,000,000 $ 16,000,000 $ 27,500,000

Direct manufacturing costs 3,700,000 7,600,000 11,200,000 Division administrative costs 3,000,000 1,200,000 5,800,000

Division margin 2,300,000 7,200,000 10,500,000

Number of employees	560	210	630
Floor space (square feet)	40,000	30,080	89,920
Data Table
Fixed Corporate Overhead Costs		Suggested Allocation Bases
Human resource management	$ 1,600,000	Number of employees
Facility	3,600,000	Floor space (square feet)
Corporate Administration	4,800,000	Division administrative costs
Total	$10,000,000
Requirements
Requirements

Allocate 2012 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 2012 fixed costs using the allocation bases suggested by Mayer. What is each division's operating margin percentage under the new allocation scheme?

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

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

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