World Imports buys products from around the world for import into the United States. The...

World Imports buys products from around the world for import into the United States. The firm is organized into a number of separate regional sales districts that sell the imported goods to retail stores. The eastern sales district is responsible for selling the imports in the northeastern region of the country. Sales districts are evaluated as profit centers and have authority over what products they wish to sell and the price they charge retailers. Each sales district employs a full-time direct sales force. Salespeople are paid a fixed salary plus a commission of 20 percent of revenues on what they sell to the retailers.

The eastern district sales manager, J. Krupsak, is considering selling an Australian T-shirt that the firm can import. Krupsak has prepared the following table of his estimated unit sales at various prices and costs. The cost data of the imported T-shirts were provided by World Imports’s corporate offices.

The unit cost of the imported shirts rises because the Australian manufacturer has limited capacity and will have to add overtime shifts to produce higher volumes. Corporate headquarters of World Imports is considering allocating corporate expenses (advertising, legal, interest, taxes, and administrative salaries) back to the regional sales districts based on the sales commissions paid in the districts. It estimates that the corporate overhead allocation rate will be 30 percent of the commissions (for every $1 of commissions paid in the districts, $0.30 of corporate overhead will be allocated). District sales managers receive a bonus based on net profits in their district. Net profits are revenues less costs of imports sold, sales commissions, other costs of operating the districts, and corporate overhead allocations.

The corporate controller, who is proposing that headquarters costs be allocated to the sales regions and included in bonus calculations, argues that all of these costs must ultimately be covered by the profits of the sales districts. Therefore, the districts should be aware of these costs and must price their products to cover the corporate overhead.

Required:

a. Before the corporate expenses are allocated to the sales districts, what wholesale price will Krupsak pick for the Australian T-shirts and how many T-shirts will he sell? Show how you derived these numbers.

b. Does the imposition of a corporate overhead allocation affect Krupsak’s pricing decision on the Australian T-shirts? If so, how? Show calculations.

c. What are the arguments for and against the controller’s specific proposal for allocating corporate overhead to the sales districts?