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)
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Get Help Now!- What was the cost of advertising and warehouse expense allocated to each of the business based on the traditional method?
- What recommendation would you make in allocating these expenses to each of the business and how much would be allocated to each business?
- 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.
- 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.
- 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.
- 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!
- So, since we take sales of the two divisions together, these amount to 150 + 25 = 175 M dollars. So, the cost …
