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
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 Divisions 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 Divisions expenses to each division.
c. After receiving her divisions profit report for this quarter ( which included the Hardware Divisions share of the Marketing Divisions costs), the president of the Hardware Division called Hallsites chief financial officer ( whose office prepared the report) and said, There must be something wrong with my divisions profit report. Hardwares sales rose and our expenses were in line with what they should have been given last quarters operating margins. But my profits tanked. Now I know that there was a major problem with Softwares 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 didnt 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 Hallsites chief financial offer to the Hardware Division president explaining that the Hardware Divisions current quarter profit report ( which includes the Divisions share of the Marketing expenses) is in fact correct and outlining the various rationales as to why Hallsite allocates the Marketing Divisions expenses to the other twodivisions.
Last Quarter This Quarter Hardware Division Software Division Hardware Division Software Division Revenue Division expenses $500.00 315.00 $700.00 308.00 $510.00 321.30 $400.00 176.00
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a Allocated Marketing Division expenses to the Hardware and Software Divisions all figures are in millions of dollars Last Quarter This Quarter Hardware Division Software Division Total Hardware Divis…View the full answer
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