Allocation of Marketing and Administrative Costs; Profit SBUs Tilton Academy allocates marketing and administrative costs to its three schools based on total annual tuition revenue for the schools. In 2009 the allocations (000s omitted) were as follows:
| Lower School | Middle School | Upper School | Total |
Tuition revenue | $1,500 | $500 | $2,000 | $4,000 |
Marketing and administration | 375 | 125 | 500 | $1,000 |
In 2010, the middle and upper schools experienced no change in revenues, but the lower school’s tuition revenue increased to $1.9 million. Marketing and administrative costs rose to $1,250,000.
Required
1. Using revenue as an allocation base, how should the costs be allocated for 2010?
2. What are the shortcomings of this allocation formula?
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