Basic Boards makes keyboards that are sold to different customers in two main distribution

channels. Recently, the company’s profitability has decreased. Management would like to
analyze the profitability of each channel based on the following information:

Based on a special study, the company allocates corporate costs to the two channels based on the
corporate resources demanded by the channels as follows: Distribution Channel A, $440,000,
and Distribution Channel B, $500,000. If the company were to close a distribution channel, none
of the corporate costs would be saved.
1. Calculate the operating income for each distribution channel as a percentage of revenue after
assigning customer-level costs, distribution costs, and corporate costs.
2. Should Basic Boards close down any distribution channel? Explain briefly.
3. Would you allocate corporate costs to divisions? Why is allocating these costs helpful? What
actions would it help you take?

(30 min.) Cost-hierarchy income statement and allocation of corporate, division, and
channel costs to customers.
1.
Distribution Distribution
Channel A Channel B Total
Revenue $2,599,506 $2,690,494 $5,290,000
Customer-level costs 1,627,047 1,783,953 3,411,000
Customer-level operating income
Distribution costs 972,459 906,541 1,879,000

Marketing costs1 275,184 284,816 560,000

Administration costs2 114,480 125,520 240,000
Allocated distribution costs 389,664 410,336 800,000
Distribution-channel operating
income after allocating
distribution costs 582,795 496,205 1,079,000
Allocated corporate costs 440,000 500,000 940,000
Fully allocated distribution
channel operating income $ 142,795 $ (3,795 $ 139,000
Distribution-channel operating
income as a percentage of
revenue 5.5% 0.14% 2.6%