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Distribution
Channel A
Distribution
Channel B
Total
Revenue
$2,599,506
$2,690,494
$5,290,000
Customer-level costs
1,627,047
1,783,953
3,411,000
Customer-level operating income
Distribution costs
972,459
906,541
1,879,000
Marketing costs1
275,184
284,816
560,000
Administration costs2
114,480
125,520
240,000
Allocated distribution costs
389,664
410,336
800,000
Distribution-channel operating
income after allocating
distribution costs
582,795
496,205
1,079,000
Allocated corporate costs
440,000
500,000
940,000
Fully allocated distribution
channel operating income
$ 142,795
$ (3,795)
$ 139,000
Distribution-channel operating
income as a percentage of
revenue
5.5%
0.14%
2.6%
1$560,000 × ($2,599,506 ÷ $5,290,000; $2,690,494 ÷ $5,290,000)
2$240,000 × ($1,627,047 ÷ $3,411,000; $1,783,953 ÷ $3,411,000)
2. Basic Boards should not close down any distribution channel. Distribution Channel B
shows a loss, but if the company was to close down this channel, it would not save any corporate
costs. Basic Boards would then forgo the operating income of $496,205 but not save any costs.
Allocating corporate costs to the distribution channels gives the misleading impression that
potential cost savings from closing down a channel are greater than the likely amount. Of course,
the overall profitability of Basic Boards is very low (2.6%), so Basic Boards should carefully
examine all its costs to see where it might be able to achieve cost savings.
3. I would allocate corporate costs to distribution channels. One important advantage of
doing so is that the full costs of supporting the sales of products to customers in a distribution
channel are included when determining customer-level profitability. In the long run, distribution
channels must be profitable on a full-cost basis if the company is to be profitable.
Another advantage of allocating corporate costs to distribution channels is to encourage
distribution-channel managers to set long-run prices to cover the costs of all resources used to
produce and sell products to customers. Full-cost allocation reduces the temptation for
companies to cut prices to simply cover partial (or variable) costs.
Allocating corporate costs will motivate managers of the distribution channels to examine
how corporate costs are planned and controlled. The distribution-channel managers will want to
understand whether these costs are providing them benefits in line with their costs. For example,
are corporate costs supporting better distribution of products to customers?
=
500,000 (–0.02) $125.10
=
$1,251,000 U
Market-size
variance
=
Actual Budgeted
market size market size
in units in units
−
Budgeted
Budgeted contribution margin
market per composite unit
share for budgeted mix
=
(500,000 – 444,000) 0.25 $125.10
=
56,000 0.25 $125.10
=
$1,751,400 F
Solution Exhibit 14-37 presents the market-share variance, the market-size variance, and the sales-
quantity variance for the third quarter 2014.
