Unicycles and bicycles: What was the cost of advertising and warehouse expense allocated to each of the businesses based on the traditional method?
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A company has two major businesses that it operates. One busines 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 75,000sq ft of the manufacturing warehouse and the bicycle business occupies the remaining 25,000 sq ft. Cost were split 50-50 between the 2 businesses for advertising (total advertising $5M) and warehouse expense (total warehouse expense $3M) in the past (traditional method)
1. What was the cost of advertising and warehouse expense allocated to each of the business based on the traditional method?
2. What recommendation would you make in allocating these expenses to each of the business 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?
PLEASE SHOW step by step (so that i can learn) and give an explanation for each.
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!. Please note that in the traditional system the allocation of the cost of advertising and warehousing is 50 - 50 that is half the cost is borne by unicycle and half the cost is borne by bicycle.
1. So, if we half the advertising cost of 5M dollars we get 2.5M dollars being allocated to unicycle and half of 5M dollars that is 2.5 M dollars being allocated to bicycles.
2. Also please note that the warehousing expenses are $3M so half of this is 1.5M that is allocated to unicycles and the other half that is 1.5M is allocated to bicycles. Please note that I am giving this step by step so that you can understand it.
2. We make recommendation that the advertising expenses should be allocated according to sales and the warehousing expenses be allocated according to the space occupied. That is fair!
1. So, since we take sales of the two divisions together, these amount to 150 + 25 = 175 M dollars. So, the cost ...
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