2. % segment margins
$3,750,000; $6,600,000;
$2,850,000; $1,350,000
÷ $14,550,000
25.77%
45.36%
19.59%
9.28%
100%
3. Allocated headquarter
cost
(Row 2 × $8,400,000)
$2,164,680
$3,810,240
$1,645,560
$779,520
$8,400,000
Arizona
Colorado
Delaware
Florida
Total
Segment margin
$3,750,000
$6,600,000
$2,850,000
$1,350,000
$14,550,000
Less: Headquarter costs
2,164,680
3,810,240
1,645,560
779,520
8,400,000
Division margin
$1,585,320
$2,789,760
$1,204,440
$ 570,480
$ 6,150,000
Allocations based on number of employees.
Arizona
Colorado
Delaware
Florida
Total
1. Number of Employees
3,000
6,000
2,250
750
12,000
2. % Number of employees
3,000; 6,000; 2,250; 750
÷ 12,000
25%
50%
18.75%
6.25%
100%
3. Allocated headquarter cost
(Row 2 × $8,400,000)
$2,100,000
$4,200,000
$1,575,000
$525,000
$8,400,000
Arizona
Colorado
Delaware
Florida
Total
Segment margin
$3,750,000
$6,600,000
$2,850,000
$1,350,000
$14,550,000
Less: Headquarter costs
2,100,000
4,200,000
1,575,000
525,000
8,400,000
Division margin
$1,650,000
$2,400,000
$1,275,000
$ 825,000
$ 6,150,000
2. The Florida Division manager will prefer to use the number of employees as the allocation
base because it results in the highest operating margin for the division.
3. The Arizona Division and the Delaware Division receive roughly the same percentage
allocation of headquarter costs regardless of the allocation base used (Arizona range =
25%–29%; Delaware range = 18.75%–23.5%). However, the Colorado Division and the
Florida Division vary widely (Colorado range = 22.4%–50%; Florida range = 6.25%–
25.1%). All four methods are reasonable options, but none clearly meets the cause-and–
effect criterion for selecting the allocation base. If larger divisions tend to consume more
of headquarters’ resources, then using division revenues or number of employees seem to
be the best choices. Without compelling reason to change, Greenbold should stay with the
division revenues as the allocation base.
Another alternative is to use segment margin as the allocation base on the grounds that
this best captures the ability of different divisions to bear corporate overhead costs.
