Finsys Finsys offers Web design and website maintenance and hosting for the mut...

Finsys

Finsys offers Web design and website maintenance and hosting for the mutual fund industry. Finsys clients are small mutual funds that do not have scale economies to design and maintain their own Web portals that their mutual fund investors can access to check account information, receive performance reports on their investments in the fund, and manage their accounts. Finsys uploads real-time information feeds and interfaces with their mutual fund clients’ IT systems. The Finsys product line consists of various tools and software modules that enable their clients to control their data and content by automating Web content, print production, and securities regulation compliance.

Finsys has four departments: marketing, Web design, website maintenance, and website hosting. The marketing department contacts potential customers to sell Finsys services, prepares bids, and negotiates final contract details. The typical contract is for three years. (Finsys’ Web design services are priced very competitively to win the initial bid.) The Web design department works with clients to design the Web client’s initial website to create the client’s brand (i.e., the look and feel of the client’s website). The website maintenance department provides day-to-day and end-ofquarter website revisions and data feeds so the mutual fund client’s customers have access to the latest information about their accounts. Finally, the website hosting department maintains the secure servers that contain the client’s mutual fund’s data and provides security against hackers and backup. Mutual fund clients of Finsys pay separately for Web design services, website maintenance, and website hosting.

Web design, website maintenance, and website hosting are profit centers, and the managers of these profit centers are rewarded based on their department’s operating income. In addition to the four departments, Finsys has an administration department consisting of the CEO, CFO, human resources, and accounting. The following data summarize Finsys’s current operating performance:

Currently, Finsys does not allocate the marketing and administration costs to the three profit centers. The CEO and CFO believe that the three profit centers’ operating profits are not indicative of the real profits of these profit centers because the profit centers are not bearing any of the marketing and administration expenses. The CEO and CFO propose allocating the marketing and administration costs back to the three profit centers based on the percentage of the profit centers’ revenues to Finsys’s total revenue.

Required:

a. Prepare a revised set of financial statements that report each profit centers’ net income after allocating the marketing and administration costs back to the three profit centers using revenues as the allocation base.

b. Briefly discuss the relative profitability of the three profit centers after allocating marketing and administration expenses using revenues as the allocation base.

c. Analyze the CEO’s and CFO’s proposal to allocate marketing and administration expenses using revenues as the allocation base. What, if any, changes would you suggest to their proposal of allocating marketing and administration expenses using revenues as the allocation base?