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    Accounting: Cost of Advertising and Warehouse Expense

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    A company has two major businesses that it operates. One business manufactures and sells unicycles for commercial use in circuses and so forth (total sales of $150M), and the other sells bicycles to the public (total sales of $20M). The unicycle business occupies 75,000 square feet of the manufacturing warehouse, and the bicycle business occupies the remaining 25,000 square feet. Cost were split 50-50 between the 2 businesses for advertising (total advertising expense of $5M) and warehouse expense (total warehouse expense of $3M) in the past (traditional method).
    1. What was the cost of advertising and warehouse expense allocated to each of the businesses based on the traditional method?
    2. What recommendation would you make in allocating these expenses to each of the businesses, and how much would be allocated to each business?
    3. What would be some of the issues of too many expenses or too little expenses being allocated to each of the businesses?

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    Solution Preview

    1. What was the cost of advertising and warehouse expense allocated to each of the businesses based on the traditional method?

    WAREHOUSING:

    Total Square ft: 75,000 + 25,000 = 100,000 Sq ft.
    Total Cost: $ 3 million
    100,000/3,000,000 = $ 30 per square feet of entire warehouse

    Allocate these proportionally:
    therefore the cost of warehousing for the unicycle business would be $2,250,000.00 and the cost for the bicycle business would be $750,000.00.

    ADVERTISING:

    Total advertising costs = $ 5 million
    Total Firm sales = $170 million
    5million/170million = 0.0294

    therefore the cost allocated to the unicycle business would be ...

    Solution Summary

    The solution determines the cost of advertising and warehouse expense.

    $2.19

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