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    Cost Allocation

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    Background information

    A company has two major businesses that it operates. One business manufactures and sells unicycles for commercial use in circuses, etc. (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).

    Allocate warehouse expenses of 3M using total square feet of the manufacturing warehouse (75,000 + 25,000).

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    Solution Preview

    Since the total expense is to be allocated based on total square feet of the manufacturing warehouse, we need to calculate the ...

    Solution Summary

    The solution explains how to allocate common cost between two businesses.