Dave Dandy Auto Sales uses television, radio, newspapers, and other types of media to advertise its products. At the end of 2012, the company president, Dave Dickens, 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. Dave 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 his or her own. Dickens budgeted total advertising cost for 2013 to be $1.9 million. He introduced the new plan to his sales managers just before the New Year.
The manager of the east sales location, Tom Stevens, 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 Tom's complaint, Dave decided to take another hard look at what each of the divisions were paying for advertising before the new allocation plan. The results were as follows:

Required
1. Using 2012 data as the cost bases, show the amount of the 2013 advertising cost ($1,900,000) that would be allocated to each of the divisions under the following criteria:
a. Dickens'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 2012
2. Which method do you think is most equitable to the divisional sales managers? What other options might President Dave Dickens have for allocating the advertising costs?

Transcribed Image Text:

Actual Number of Cars Sold in 2012 3,900 1,040 2,730 5,330 Actual Advertising Cost Incurred in 2012 $ 282,750 435,000 652,500 Sales Location East West North South 804,750 $2,175,000 13,000