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

Exercise 3

Rextera
Rextera produces a line of skin care products. It has two product lines: Young Skin and Moisturizer. Young Skin is a patented, heavily promoted, and proprietary cream that removes wrinkles and "makes you look ten years younger." Moisturizer is a cream that moisturizes the skin. Rextera sells its two products lines only through its Web site. Its strategy is to drive consumers to its Web site via articles in fashion and health magazines, other Web sites, and blogs about Young Skin. Although many customers initially are drawn to Rextera's site because of these Young Skin stories, only a small fraction of Rextera Web site visitors buy Young Skin (due to its high price).
The following data summarize the operating data on the two product lines.
Variable cost consists of both variable manufacturing cost and variable selling and distribution (shipping) cost. Young Skin and Moisturizer are produced in separate factories, each with its own separable fixed manufacturing overhead. Both product lines share the same common marketing costs (primarily the cost of maintaining the Web site and advertising the Web site via articles placed in fashion and health magazines, other Web sites, and blogs).
Product-line profits are not used in calculating any Rextera manager bonus or compensation. Rextera only sells its products in the United States.
Required:
a. Prepare a report showing product-line profits for Young Skin and Moisturizer after allocating the common fixed marketing costs of $1,000,000, using total revenue on each of the two product lines.
b. Rextera management worries that using revenues to allocate the common fixed marketing costs as in part ( a ) is distorting the relative profits of the two product lines. They believe a more accurate way to allocate these costs is to analyze how customers utilize the Rextera Web site. After analyzing the various Web pages downloaded by Web site visitors after coming to the Rextera home page, the following Web views were generated by visitors to the Rexera Web site during the last six months:
Prepare a report showing product line profits for Young Skin and Moisturizers after allocating the common fixed marketing costs using Web page views as the allocation base.
c. Which of the two reports prepared in ( a ) and ( b ) best captures the profitability of Young Skin and Moisturizer?