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# Watson Company's Net Income Percentage

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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:
Current Year 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
Gross margin \$111,000 \$96,000

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.

#### Solution Preview

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:
Current Year 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