Accounting for Decision Making and Control 8th Edition by Jerold Zimmerman

Exercise 6

Scanners Plus
Scanners Plus manufactures and sells two types of scanners for personal computers, the Home Scanner and the Pro Scanner. The Home model is a low resolution model for small office applications. The Pro model is a high resolution model for professional use. The two models are manufactured in separate facilities and each model is treated as a profit center. This table summarizes the prices and costs of each model.
Both models are sold through large office supply and computer stores and through computer catalogs. The marketing department of Scanners Plus sells both models. It has a direct sales force that sells to retail stores and an advertising group that prepares and places ads in computer magazines and computer catalogs. The annual operating budget of the marketing group is $1,000,000. The marketing costs can be allocated to the two profit centers in one of two ways: either on the basis of total revenues or on the basis of 24 percent to the Home model and 76 percent to the Pro model.
At a selling price of $1,600, the Home model division projects the number of units it expects to sell next year to be either 1,000 units or 1,400 units, each equally likely. Similarly, at $8,800, either 600 or 800 units of the Pro model are equally likely to be sold. The demand for Pro scanners is independent of the demand for Home scanners. That is, one can be in high demand while the other one can be in either low or high demand.
Required:
a. Calculate total revenues under various scenarios for the Home model.
b. Calculate total revenues under various scenarios for the Pro model.
c. Suppose the marketing department costs of $1 million are allocated to Home and Pro models using the predetermined, fixed proportions of 24 percent to Home and 76 percent to Pro. Prepare a table projecting all the various total profits of Home and Pro after allocating marketing costs using these predetermined rates.
d. Calculate all the possible overhead proportions that can result from allocating the marketing department costs using the revenues in each profit center as the allocation base. (Round all overhead proportions to two significant digits, e.g., 44.67 percent rounds to 45 percent.)
e. Same as in ( c ), except calculate profits for the two profit centers using the overhead rates computed in ( d ).
f. Parts ( c ) and ( e ) asked you to compute divisional profits for the Home and Pro models using two different methods for allocating marketing costs. Comment on the relative advantages and disadvantages of the two methods.