Hallsite Imaging produces hardware and software for imaging the structures of the human eye and the optic nerve. Hallsite systems are in most major medical centers and leading ophthalmology clinics. Hallsite has three divisions: Hardware, Software, and Marketing. All three are profit centers, and the three divisional presidents are compensated based on their division’s profits. The Hardware Division produces the equipment that captures the images, which are then viewed on desktop PCs. The Software Division produces the software that runs on both Hallsite imaging equipment and the users’ PCs to view, manipulate, and manage the images. Hallsite hardware only works with the Hallsite software, and the software can only be used for images captured by Hallsite hardware.
The Marketing Division produces the marketing materials and has a direct sales force of 1,000 Hallsite people that sells both the hardware and software in the United States (Hallsite operates only in the United States). To assess the profits of the Hardware and Software Divisions, the costs of the Marketing Division are allocated back to the Hardware and Software Divisions based on the revenues of the two divisions. The following table summarizes the divisional sales and divisional expenses (before allocation of Marketing Division costs) for the Hardware and Software Divisions for last quarter and this quarter. (All figures are in millions of dollars.)

The Marketing Division reported divisional costs of $ 320 million last quarter and $ 370 million this quarter.

a. Allocate the Marketing Division’s costs to the Hardware and Software Divisions for last quarter and this quarter.
b. Calculate the Hardware and Software Divisions’ profits for this quarter and last quarter after allocating the Marketing Division’s expenses to each division.
c. After receiving her division’s profit report for this quarter ( which included the Hardware Division’s share of the Marketing Division’s costs), the president of the Hardware Division called Hallsite’s chief financial officer ( whose office prepared the report) and said, “ There must be something wrong with my division’s profit report. Hardware’s sales rose and our expenses were in line with what they should have been given last quarter’s operating margins. But my profits tanked. Now I know that there was a major problem with Software’s new version 7.0 that hurt new sales of upgrades to version 7.0 and required more Marketing resources to address our customers’ concerns with this new software. But why am I getting hammered? I didn’t cause the software problems. My hardware continues to sell well because version 6.8 of the software still works great. This is really very unfair.” Write a memo from Hallsite’s chief financial offer to the Hardware Division president explaining that the Hardware Division’s current quarter profit report ( which includes the Division’s share of the Marketing expenses) is in fact correct and outlining the various rationales as to why Hallsite allocates the Marketing Division’s expenses to the other twodivisions.

  • CreatedDecember 15, 2014
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