Relevant costs, performance evaluation, goal-congruence. Pike Enterprises has three operat¬

ing divisions. The managers ofthese divisions are evaluatedon their divisional operating income, a figure that includes an allocation of corporate overhead proportional to the revenues of each division. The operating income statement (in thousands) for the first quarter of 2007 is as follows:

950 CHAPTER 24 Andorian Division Orion Division Tribble Division Total Revenues $2,400 $1,440 $1,920 $5,760 Cost of goods sold 1,260 648 768 2,676 Gross margin 1,140 792 1,152 3,084 Division overhead 300 150 192 642 Corporate overhead 480 288 384 1,152 Division operating income $ 360 $ 354 $ 576 $1,290 The manager of the Andorian Division is unhappy that his profitability is about the same as the Orion Division’s and is much less than the Tribble Division’s, even though his revenues are much higher than either of these other two divisions. The manager knows that he is carrying one line of products with very low profitability. He was going to replace this line of business as soon as more profitable product opportunities became available, but he has kept it because the line is marginally profitable and uses facilities that would otherwise be idle. That manager now realizes, however, that the sales from this product line are attracting a fair amount of corporate overhead because of the allocation procedure, and maybe the line is already unprofitable for him. This low-margin line of products had the following charac¬
teristics for the most recent quarter (in thousands):
Revenues $960 Cost of goods sold 720 Avoidable division overhead 120 Required 1. Prepare the operating income statement for Pike Enterprises for the second quarter of 2007.
Assume that revenues and operating results are identical to those of the first quarter except that the manager of the Andorian Division has dropped the low-margin product line from his product group.
2. Is Pike Enterprises better offfrom this action?
3. Is the Andorian Division manager better off from this action?
4. Suggest changes for Pike’s system of division reporting and evaluation that will motivate division managers to make decisions that are in the best interests of Pike Enterprises as a whole. Discuss any potential disadvantages ofyour proposal.