Question: Doug Dandy Auto Sales uses all types of media to

Doug Dandy Auto Sales uses all types of media to advertise its products (television, radio, newspaper, and so on). At the end of 2013, the company president, Doug Davenport, decided that all advertising costs would be incurred by corporate headquarters and allocated to each of the company’s four sales locations based on number of vehicles sold. Doug was confident that his corporate purchasing manager could negotiate better advertising contracts on a corporate-wide basis than each of the sales managers could on their own. Davenport budgeted total advertising cost for 2014 to be $ 1.7 million. He introduced the new plan to his sales managers just before the New Year. The manager of the east sales location, Mike Samson, was not happy. He complained that the new allocation method was unfair and would increase his advertising costs significantly over the prior year. The east location sold high volumes of low-priced used cars and most of the corporate advertising budget was related to new car sales. Following Mike’s complaint, Doug decided to take another hard look at what each of the divisions was paying for advertising before the new allocation plan. The results were as follows:

1. Using 2013 data as the cost bases show the amount of the 2014 advertising cost ($1,700,000) that would be allocated to each of the divisions under the following criteria:
a. Davenport’s allocation method based on number of cars sold
b. The stand-alone method
c. The incremental-allocation method, with divisions ranked on the basis of dollars spent on advertising in 2013
2. Which method do you think is most equitable to the divisional sales managers? What other options might President Doug Davenport have for allocating the advertisingcosts?
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  • CreatedMay 14, 2014
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