OPERATIONS
Unicycles Bicycles
Total sales $150M $150M
Occupies 75,000 sq. ft. 25,000 sq. ft.
Advertising $2.5M $2.5M
Total expenses $1.5M $1.5M
Based on the traditional method, advertising and total expenses are divided equally between the two businesses. With 75% of the warehouse space, the unicycle business makes 88% of the total sales for the company. With 25% of the warehouse space, the bicycle business makes 12% of the total sales for the company.
In order to make such a strategic decision the costs have to be accurate and activity-based. One system that aids in this decision is the Activity-based costing system (ABC) (Horngren, Sundem, & Stratton, 2005). This system first accumulates all direct costs into the highly performed activities. Then it allocates those activity-costs groups to believable and dependable cost drivers. Based on financial data this system helps the company make a more strategic decision. I strongly recommend this company invest in this system. There are always benefits and drawbacks of any ¡§system¡¨. Some of the benefits of the activity-based costing system (Horngren, Sundem, & Stratton, 2005):
?Ï Accuracy of margins.
?Ï Greater resource diversity.
?Ï Detecting activities that are not cost efficient activities.
I believe that the unicycle business should pay total expenses of $2.5M and receive in advertising $4.4M. The remaining balance of total expenses should go to the bicycle ...