Diagnostic Imaging Software (DIS) is the leading producer of imaging software for the health sciences. DIS develops, writes, produces, and sells its software through two direct selling organizations: North America and South America. Each of these direct selling forces is evaluated and rewarded as profit centers. The remaining world sales of DIS software are handled through independent distributors in Europe, Asia, and Africa. DIS has a software development group that designs, writes, and debugs the software before turning it over to the direct sales organizations ( North and South America) and the independent distributors who then sell the software. The cost of designing, writing, and debugging the software is $ 12 million this year. The following table presents the income statements of the two divisions ( millions of $) for this year:

Senior management of DIS wants to allocate the software costs to the two direct- selling forces in order to evaluate and reward their performance.

Required:

a. Calculate the profits of the two direct selling organizations (North and South America) after allocating the software costs of $ 12 million based on the relative revenues of the two organizations. (Round all decimals to 3 significant digits.)

b. Calculate the profits of the two direct selling organizations (North and South America) after allocating the software cost of $ 12 million based on the relative profits before software development cost of the two organizations. (Round all decimals to 3 significant digits.)

c. Calculate the profits of the two direct selling organizations (North and South America) after allocating the software cost of $ 12 million where 75 percent of the cost is assigned to North America and 25 percent to South America. (Round all decimals to 3 significant digits.)

d. Discuss the advantages and disadvantages of each of the three allocation methods used in parts (a), (b), and (c) above.

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North America South America Revenues $17.800 $6.700 Operating expenses 5.340 3.015 Profit before software development cost $12.460 $3.685