Tilist Golf is a premier producer of golf clubs and golf balls. The Ball Division makes two types of balls: a professional ball (the “Masters”) played by professional and top amateur players, and a mass- market ball (the “Distance”) which targets weekend players. Although most golf balls are very similar in construction and performance, slight differences exist between them. The Masters ball is a little softer and allows skilled players to put more spin on the ball for control. The Distance ball is a little harder with a more durable cover. While the two balls perform similarly, many golfers perceive
a. Prepare income statements for the two ball types after allocating the $ 61.429 million of overhead based on revenue.
b. Senior management of the Ball Division has undertaken a review of the cost allocation methodology used in part (a). They hired an ABC consultant and formed an ABC task force to design a new allocation scheme that better allocates the $ 61.429 million overhead to the two ball types. The overhead consists of the following items:
Promotional samples ........... $ 1,075,000
R& D.................. 3,450,000
Ball Division headquarters expenses ..... 3,567,000
Overhead................ $ 61,429,000
Promotional samples consist of Tilist balls given away to touring pros under Til-ist sponsorships, marketing opportunities, and charity events. $ 950,000 of Masters and $ 125,000 of Distance balls comprise the $ 1,075,000 of promotional samples. The $ 18.5 million of sponsorships consists of payments to touring professional golfers expected to do well in televised tournaments. Sponsored pros are paid to play Tilist balls and wear the Tilist name on their hats or shirts. Sponsorships are aimed at increasing Tilist’s name recognition across all types of golfers. Senior managers and the ABC task force believe the sponsorships expenditure is best assigned to the two divisions based on the number of balls sold. The advertising expenditure of $ 34,837,000 covers television and print ads ($ 1.35 million for Masters and $ 33.487 million for Distance). Tilist has a research lab where it designs new balls by experimenting with different dimple patterns, covers, and cores. About one- third of the R& D effort is devoted to improving the Masters, and two- thirds of the R& D effort is directed toward improving the Distance. After an extensive study of the various functions of the Ball Division’s headquarters expenses, including the time spent by the various personnel in the two ball divisions, the ABC task force has agreed that 40 percent of the $ 3.567 million headquarters expenses should be allocated to Masters and the remainder to Distance. Prepare income statements based on the findings of the ABC task force. c. Based on the income statements prepared in part ( a ) ( overhead allocated using revenues) and part (b) ( ABC overhead allocations), what conclusions can you draw about the relative profitability of the two ball types?
c. Based on the income statements prepared in part (a ) ( overhead allocated using revenues) and part (b) ( ABC overhead allocations), what conclusions can you draw about the relative profitability of the two ball types?