Case Analysis - WATSON Company
Problem 25-2
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 please because of the results of operations of the line for the current year. The division should a decrease of the result in net income percentage, as follows:
Current Year Last Year
Net sale $252,000 $216,000
Cost of good sold: Division fixed Cost $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 expense 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 costs 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.
Watson Company
A. Performance Report ---Division A
Current Year Last Year
Net Sales $252,000 $216,000
Cost of good sold: Variable costs - $72,000 $72,000 Division fixed costs - 29,000 101,000 29,000 101,000
Gross margin - 151,000 115,000
Selling and administrative expenses: Variable expense - 22,000 19,000 Division fixed expenses - 25,000 47,000 22,000 41,000
Contribution t allocated costs and expenses - $104,000 $ 74,000
B. Obviously, Division A performed better with in the current year increasing 16.67% of net sales from last year’s performance. However there is an increase as well in contribution of allocated costs and expenses of 40.54% of current year from last year’s performance. Since the cost allocation is in the
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 please because of the results of operations of the line for the current year. The division should a decrease of the result in net income percentage, as follows:
Current Year Last Year
Net sale $252,000 $216,000
Cost of good sold: Division fixed Cost $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 expense 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 costs 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.
Watson Company
A. Performance Report ---Division A
Current Year Last Year
Net Sales $252,000 $216,000
Cost of good sold: Variable costs - $72,000 $72,000 Division fixed costs - 29,000 101,000 29,000 101,000
Gross margin - 151,000 115,000
Selling and administrative expenses: Variable expense - 22,000 19,000 Division fixed expenses - 25,000 47,000 22,000 41,000
Contribution t allocated costs and expenses - $104,000 $ 74,000
B. Obviously, Division A performed better with in the current year increasing 16.67% of net sales from last year’s performance. However there is an increase as well in contribution of allocated costs and expenses of 40.54% of current year from last year’s performance. Since the cost allocation is in the