Pike Enterprises has three operating divisions. The managers of these divisions are evaluated on their divisional operating income, a figure that includes an allocation of corporate overhead proportional to Pike Enterprises has three operating 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 20_8 is as follows:

4 Andorian Division Orion Division Tribble Division Total

Revenues $2,000 $1,200 $1,600 $4,800

Cost of goods sold 1,050 540 640 2,230

Gross margin 950 660 960 2,570

Division overhead 250 125 160 535

Corporate overhead 400 240 320 960

Division operating income 300 295 480 1,075

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 characteristics for the most recent quarter (in thousands):

Revenues $800

Cost of goods sold 600

Avoidable division overhead 100

Assignment: a) Prepare the operating income statement for Pike Enterprises for the second quarter of 20_8. Assume that revenues and operating results are identical to the first quarter except that the manager of the Andorian Division has dropped the lowmargin product line from his product group. b) Is Pike Enterprises better off from this action? c) Is the Andorian Division manager better off from this action? d) Suggest changes for Pike's system of division reporting and evaluation that will motivate division managers to make decisions that are in the best interest of Pike Enterprises as a whole. Discuss any potential disadvantages of your proposal.