Cost allocation to divisions. Lenzig Corporation has three divisions: Pulp, Paper, and Fibers. Lenzig’s new controller, Ari Bardem, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2009:

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

1. Allocate 2009 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 2009 fixed costs using the allocation bases suggested by Bardem. What is each division’s operating margin percentage under the new allocation scheme?

3. 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?

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

Pulp Paper Fibers $8,500,000 $17,500,000 $24,000,000 8,600,000 Revenues Direct manufacturing costs Division administrative costs Division margin 11,300,000 4,100,000 2,000,000 $2.400,000 $ 7,100.000 $ 9.500,000 Number of employees Floor space (square feet) 350 35,000 250 24,000 400 66,000