Question

Stable Enterprises is organized into two geographic divisions (Asia and Europe) and a corporate headquarters. Late in year 7, the Stable Finance Department prepared financial operating plans (budgets) for the two divisions, shown as follows (in thousands of dollars).

	Asia			Europe
Revenues	$	28,600		$	36,400
Direct division costs		14,300			21,840
Operating profit before allocation	$	14,300		$	14,560

Corporate overhead costs (in thousands of dollars) are expected to be $15,000 in year 8. Of the $15,000, $8,500 is fixed and $6,500 is variable, with respect to revenue. Division managers are evaluated and compensated in part on division operating profit relative to the budget.

Required:

a. Suppose corporate overhead is allocated to the two divisions based on relative revenue. What are the budgeted operating profits in each division for year 8 after the corporate costs are allocated?

b. At the end of year 8, actual corporate costs incurred (in thousands of dollars) were $14,000. Of the $14,000, $8,000 was fixed. Actual results (in thousands of dollars) in the two divisions are as follows.

	Asia			Europe
Revenues	$	28,600		$	36,400
Direct costs		14,300			21,840
Operating profit before allocation	$	14,300		$	14,560

What are the operating profits in each division for year 8 after the corporate costs are allocated?

A.) Suppose corporate overhead is allocated to the two divisions based on relative revenue. What are the budgeted operating profits in each division for year 8 after the corporate costs are allocated? (Do not round intermediate calculations.)

B.) What are the operating profits in each division for year 8 after the corporate costs are allocated? (Do not round intermediate calculations.)

Answer 1

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