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FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Question
What are the advantages and disadvantages of The Insurance Company allocating corporate costs to the regions?

Transcribed Image Text:Cost-hierarchy income statement and allocation of corporate costs to customers. The Insurance
Company insures homeowners in three regions of the United States: Eastern, Midwest, and South. In the
past year, several hurricanes hit the Southern region of the United States, requiring payments to insured
homeowners.
Management of the company wishes to analyze the profitability of the three key regions and has gath-
ered the following information:
Eastern
Midwest
South
Total
$4,000,000 $2,600,000
$1,800,000
$8,400,000
6,362,000
$2,038,000
24.26%
Revenue
Customer-level costs
1,768,000
$1,080,000 $ 832,000
32%
2,920,000
1,674,000
Customer-level operating income
Customer-level operating income percentage
$ 126,000
7%
27%
In addition to the customer-level costs above, the company also allocates $750,000 of corporate costs to
each region based on the revenues of each region.
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