Cycle Company

What was the cost of advertising and warehouse expense allocated to each of the business based on the traditional method?

In a traditional method the costs are split 50:50, which is shown below. Not a practical way to spend the money because the unicycle business makes most of the money.

What recommendation would you make in allocating these expenses to each of the business and how much would be allocated to each business?

I would suggest that you split the expenses according to how the company does business. In order to keep things proportional you would have to use the formula (individual sales/total sales)*total expenses. Refer to table 1-1. I also think that the cost of the warehouse space should be allocated by the amount of space each department occupies. Bicycles 25% and Unicycles 75% .

What would be some of the issues of too many expenses or too little expenses being allocated to each of the businesses?

The biggest issue I see of improper allocation of the funds is in the accuracy of the budgeting in the upcoming years. If the sales of bicycles goes up and the sales of unicycles goes down then it would be ease to reallocate the expenses according to how much each is selling and how much space they are using in the warehouse. If all things are being equal, you might lose out on the more popular unicycle sales because you put too much money into the ever unpopular bicycle advertising which hasn't really made a big difference.

Table 1-1

Cycle Company

Unicycles Bicycles

Total Sales $150M $20M

Warehouse Space 75000sqft 25000sqft

Total advertising expense $5,000,000