Allocation of Advertising and Warehouse Expenses
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A company has two major businesses that it operates. One business manufactures and sells unicycles for commercial use in circuses, etc. ( total sales $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 the 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 business and how much would be allocated to each business?
3. What would be some of the issues of too many expenses or too littles expenses being allocated to each of businesses?
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Solution Summary
This solution is comprised of calculations and an explanation for the allocation of expenses to the company.
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1. What was the cost of the advertising and warehouse expense allocated to each of the business based on the traditional method?
Based on the traditional method, the cost were split 50-50 to each of the business as follows:-
Advertising expense = $5m x 0.50 = $2.5m
Warehouse expense = $3m x 0.50 = $1.5m
2. What recommendation would you make in allocating ...
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