P $7-6$: Avid Pharmaceuticals

Avid, a small, privately held biotech pharmaceutical manufacturing firm, specializes in developing and producing a set of drugs for rare

classes of cancers. Avid has two divisions that share the same manufacturing and research facility. The two divisions, while producing and

selling two different classes of products to different market segments, share a common underlying science and related manufacturing

processes. It is not unusual for the divisions to exchange technical know$-$how, personnel, and equipment. The following table summarizes

their most current year's operating performance:

Avid's corporate overhead amounts to $$900,000$ per year. Management is debating various ways to allocate the corporate overhead to the

two divisions. Allocation bases under consideration include: number of employees, plant square footage, revenues, operating expenses, and

operating profits. Each division is treated as a separate profit center with each manager receiving a bonus based on his or her division's net

income $($operating profits less allocated corporate overhead$).$

Required:

a$.$ For each of the five proposed allocation bases, compute Division A$\text{'}$s and Division B$\text{'}$s net income $($operating income less allocated

corporate overhead$).$

b$.$ Recommend one of the five methods $($or no allocation of corporate overhead$)$ to allocate corporate overhead to the two divisions.

Be sure to justify your recommendation.