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
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.
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Solution Summary
This solution prepares a statement that shows the performance of division A and calculates the controllable margin. It also comments on the method of the company to calculate bonuses and suggests improvements.
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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
$111,000 $96,000
Gross margin
Selling and administrative expense
Division fixed ...
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