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Which allocation method for indirect headquarters costs

Gether Corporation manufactures appliances. It has four division: Refrigerator, Stove, Dishwasher, and Microwave oven. Each division is located in a different city and the headquarters is located in Oakland, California. Headquarters incurs a total of $14,255,000 in costs, none of which are direct costs of any o the divisions. Revenues, costs, and facility space for each division are as follows:

Refrigerator Stove Dishwasher Microwave Oven
Revenue $10,900,000 $18,800,000 $11,500,000 $6,780,000
Direct costs $5,700,000 $10,400,000 $6,200,000 $3,220,000
Segment margin $5,200,000 $8,400,000 $5,300,000 $3,560,000
Sq. ft. of floor space 130,000 90,000 80,000 100,000

Gether wants to allocate the indirect headquarters on the basis of either square feet or segment margin for each division.

1. Allocate the indirect headquarters costs to each division, first using square feet of space and then using segment margin as the allocation base. Calculate the division operating margins after each allocation in dollars as a percentage of revenue.
2. Which allocation base do you prefer? Why?
3. Should any of the divisions be dropped based on your calculations? Why or why not?

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Solution Summary

This solution discusses different allocation methods and applies it to the indirect headquarters cost to each division. Calculations are also shown to determine the division operating margins and recommendations are made on which allocation method to use and if any of the divisions should be dropped.