Problem:
Watson Company pays a bonus to any of its five division managers who increase their percentage of income to sales over that of the year before. The manager of Division A is displeased because of the results of operations of the line for the current year. The division showed a decrease in net income percentage, as follows:
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|
Current Year
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Last Year
|
|
Net sales
|
|
$252,000
|
|
$216,000
|
|
Cost of goods sold
|
|
|
|
|
|
Division fixed costs
|
$29,000
|
|
$29,000
|
|
|
Allocated costs
|
$40,000
|
|
$19,000
|
|
|
Variable costs
|
$72,000
|
$141,000
|
$72,000
|
$120,000
|
|
|
|
$111,000
|
|
$96,000
|
|
Gross margin
|
|
|
|
|
|
Selling and administrative expense
|
|
|
|
|
|
Division fixed expenses
|
$25,000
|
|
$22,000
|
|
|
Allocated expenses
|
$45,000
|
|
$37,000
|
|
|
Variable expenses
|
$22,000
|
$92,000
|
$19,000
|
$78,000
|
|
Income
|
|
$19,000
|
|
$18,000
|
The items of allocated costs and expenses represent general cots and expenses of the company that were allocated to the divisions.
Required:
a. Prepare a statement that shows more clearly the performance of Division A.
b. Comment on the method used by the company to calculate bonuses.