Relevant costs, performance evaluation, goal-congruence. Soccer Fifa Inc. has three operat- ing divisions. The managers of these divisions are evaluated on 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 2010 is as follows:

The manager of the Azurro Division is unhappy that his profitability is about the same as the Orange Division’s and is much less than the Canarinha 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. In the first quarter of 2010 this low-margin line of products had a gross margin of $250,000 (with revenues for $960,000) and avoidable division overhead of $120,000.

REQUIRED 1. Prepare the operating income statement for Soccer Fifa Inc. for the second quarter of 2010. Assume that revenues and operating results are identical to those of the first quarter except that the manager of the Azurro Division has dropped the low-margin product line from his product group. 2. Is Soccer Fifa better off from this action? 3. Is the Azurro Division manager better off from this action? 4. Suggest changes for Soccer Fifa's system of division reporting and evaluation that will motivate division managers to make decisions that are in the best interests of Soccer Fifa Inc. as a whole. Discuss any potential disadvantages of your proposal.LO1

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Azurro Orange Division Division Canarinha 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