Behavioral impact of budgeting Bianca Pender, the director of Hume Corporation’s Mail-Order Division, is preparing the division’s budget proposal for next year. The company’s president will review the proposal for approval. Ms. Pender estimates the current year final operating results will be as follows.

Ms. Pender believes that the cost of goods sold as well as selling and administrative expenses will continue to be stable in proportion to sales revenue.
Hume has an incentive policy to reward division managers whose performance exceeds their budget. Division directors receive a 10 percent bonus based on the excess of actual net income over the division’s budget. For the last two years, Ms. Pender has proposed a 4 percent rate of increase, which proved accurate. However, her honesty and accuracy in forecasting caused her to receive no year-end bonus at all. She is pondering whether she should do something differently this time. If she continues to be honest, she should propose an 8 percent growth rate because of robust market demand. Alternatively, she can propose a 4 percent growth rate as usual and thereby expect to receive some bonus at year-end.

Required

a. Prepare a pro forma income statement, assuming a 4 percent estimated increase.

b. Prepare a pro forma income statement, assuming an 8 percent increase.

c. Assume the president eventually approves the division’s proposal with the 4 percent growth rate.
If growth actually is 8 percent, how much bonus would Ms. Pender receive?

d. Propose a better budgeting procedure for Hume Corporation.