Budgeting and performance evaluation (LO4). Florida Cruises operates a fleet of glass bottom boats that give tours of the coral reefs off Key West, Florida. Since its inception, the firm has fetched its owner a healthy return on investment. One reason the company does so well is that the owner believes in keeping tight control over operations. Every December, the owner and the manager evaluate the prior years operations and care-fully plan next years operations. At the end of these discussions, they project income for the coming year. The manager and other operating staff receive a bonus if actual income exceeds budgeted income. This incentive scheme appeared to work well in the past. The manager and the staff worked hard to reap bonuses at the end of each year. However, the performance for the most recent year did not quite measure up to expectations, as the following data indicate:

Florida Cruises
Income Statement for Year Ending December 31
	Budgeted	Actual
Revenues	$2,800,000	$2,050,000
Less
Variable costs
Direct materials (fuel, supplies)	480,000	520,000
Direct labor	1,100,000	950,000
Variable overhead	175,000	148,000
Fixed costs
Operating overhead (boats, pier, salaries)	320,000	420,000
Marketing and administration	380,000	325,000
Profit before taxes	$345,000	($313,000)

Naturally, the manager and staff did not receive a bonus. However, the manager was upset with this turn of events. We all worked extra hard this year. It was a tough year. The fuel prices more than doubled. We lost three months worth of revenues because of hurricanespeople were fleeing the Florida Keys. How can we expect tourists to come in and see coral reefs at a time like that? We should not be punished for what is not under our control, he complained. To make his point, the manager provided the following additional information to the owner:

The loss in revenues is mostly attributable to two devastating hurricanes. While hurricanes are common in Key West, the past year set a record in terms of the number and severity of hurricanes that passed over the Keys.

The increase in direct material costs is attributable to a sharp increase in fuel prices (the price run-up was not anticipated at the time of budgeting).

About $140,000 of fixed operations overhead was attributable to the expenses that were incurred to protect the boats from the hurricanes and to fix some unavoidable damage to the pier and sheds. The manager claimed that if the budget were revised to account for these factors, the actual performance would appear much more reasonable given the circumstances.

Required: Should a bonus be awarded to the manager and operating staff?