American Wood Products is the world’s largest integrated timber grower and wood processo...

American Wood Products is the world’s largest integrated timber grower and wood processor. The forest group manages and harvests timber from company-owned and public forests. The lumber group buys cut trees from either the forest group or other timber companies and processes the trees into a full line of wood products, including plywood, lumber, and veneers. The building products group buys wood products (from the lumber group and other companies), as well as other building supplies such as drywall and roofing products, and distributes these products worldwide to retailers. The senior managers in each group receive a bonus based on their group’s profit before taxes.

Central corporate overhead is allocated to each group based on actual sales revenues in each division. The current year’s corporate overhead allocated to the three groups is

Here are operating data for the last fiscal year (in millions of dollars):

Instead of allocating $1.5 billion of overhead to the groups on the basis of revenues, the controller is proposing a different allocation base for each of the overhead categories. In particular,

Required:

a. Calculate each group’s profits before taxes using the controller’s proposed allocation method.

b. What are the pros and cons of allocating corporate overhead to operating divisions?

c. What are the advantages and disadvantages of the controller’s proposed change relative to the existing method?