Fahley Corporation has three divisions: pulp, paper, and fibers. Fahley's new controller, Tim Miller, is reviewing...

 

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Fahley Corporation has three divisions: pulp, paper, and fibers. Fahley's new controller, Tim Miller, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2017: (Click the icon to view the data.) Requirement 1. Allocate 2017 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)? Division margin Allocated fixed corporate-overhead Allocate the fixed corporate-overhead costs, then calculate the division operating margins in dollars and as a percentage of revenue. (Round allocation proportions to one decimal place, X.X%, and dollar amounts to the nearest dollar. Enter operating margin percentages to one decimal, X.X%.) Operating margin Operating margin % $ Pulp 3,000,000 % Paper $ 7,300,000 % $ Until now, Fahley Corporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Miller asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases: Fibers 9,700,000 (Click the icon to view the fixed corporate overhead and new allocation bases.) Read the requirements. % Requirements 1. Allocate 2017 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 2017 fixed costs using the allocation bases suggested by Miller. 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 incentives are based on 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 Fahley Corporation use? Why? How might Miller overcome any objections that may arise from the divisions? Data table Revenues Direct manufacturing costs Division administrative costs Division margin Number of employees Floor space (square feet) $ $ $ $ Pulp 9,000,000 $ 3,200,000 2,800,000 3,000,000 $ 360 $ 44,800 $ Paper 16,200,000 $ 7,900,000 1,000,000 7,300,000 $ 180 $ 25,620 $ Fibers 24,300,000 10,400,000 4,200,000 9,700,000 660 69,580 X cat age Data table Fixed Corporate-Overhead Costs Human resource management $ Facility Corporate administration Total Print $ Suggested Allocation Bases 1,400,000 Number of employees 2,800,000 Floor space (square feet) 5,000,000 Division administrative costs 9,200,000 Done Fahley Corporation has three divisions: pulp, paper, and fibers. Fahley's new controller, Tim Miller, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2017: (Click the icon to view the data.) Requirement 1. Allocate 2017 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)? Division margin Allocated fixed corporate-overhead Allocate the fixed corporate-overhead costs, then calculate the division operating margins in dollars and as a percentage of revenue. (Round allocation proportions to one decimal place, X.X%, and dollar amounts to the nearest dollar. Enter operating margin percentages to one decimal, X.X%.) Operating margin Operating margin % $ Pulp 3,000,000 % Paper $ 7,300,000 % $ Until now, Fahley Corporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Miller asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases: Fibers 9,700,000 (Click the icon to view the fixed corporate overhead and new allocation bases.) Read the requirements. % Requirements 1. Allocate 2017 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 2017 fixed costs using the allocation bases suggested by Miller. 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 incentives are based on 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 Fahley Corporation use? Why? How might Miller overcome any objections that may arise from the divisions? Data table Revenues Direct manufacturing costs Division administrative costs Division margin Number of employees Floor space (square feet) $ $ $ $ Pulp 9,000,000 $ 3,200,000 2,800,000 3,000,000 $ 360 $ 44,800 $ Paper 16,200,000 $ 7,900,000 1,000,000 7,300,000 $ 180 $ 25,620 $ Fibers 24,300,000 10,400,000 4,200,000 9,700,000 660 69,580 X cat age Data table Fixed Corporate-Overhead Costs Human resource management $ Facility Corporate administration Total Print $ Suggested Allocation Bases 1,400,000 Number of employees 2,800,000 Floor space (square feet) 5,000,000 Division administrative costs 9,200,000 Done

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