Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Problem 14-16 Behavioral impact of budgeting Butler Corporation has three divisions, each operating as a responsibility center. To provide an incentive for divisional executive officers,

Problem 14-16 Behavioral impact of budgeting

Butler Corporation has three divisions, each operating as a responsibility center. To provide an incentive for divisional executive officers, the company gives divisional management a bonus equal to 15 percent of the excess of actual net income over budgeted net income. The following is French Divisions current years performance.

Current Year

Sales revenue

$2,000,000

Cost of goods sold

1,250,000

Gross profit

750,000

Selling & admin. expenses

450,000

Net income

$ 300,000

The president has just received next years budget proposal from the vice president in charge of French Division. The proposal budgets a 5 percent increase in sales revenue with an extensive explanation about stiff market competition. The president is puzzled. French has enjoyed revenue growth of around 10 percent for each of the past five years. The president had consistently approved the divisions budget proposals based on 5 percent growth in the past. This time, the president wants to show that he is not a fool. I will impose a 15 percent revenue increase to teach them a lesson! the president says to himself smugly.

Assume that cost of goods sold and selling, and administrative expenses remain stable in proportion to sales.

Required

a. Prepare the budgeted income statement based on French Divisions proposal of a 5 percent increase.

b. If growth is actually 10 percent as usual, how much bonus would French Divisions executive officers receive if the president had approved the divisions proposal?

c. Prepare the budgeted income statement based on the 15 percent increase the president imposed.

d. If the actual results turn out to be a 10 percent increase as usual, how much bonus would French Divisions executive officers receive since the president imposed a 15 percent increase?

e. Propose a better budgeting procedure for Butler Corporation.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Advanced Digital Auditing Theory And Practice Of Auditing Complex Information Systems And Technologies

Authors: Egon Berghout, Rob Fijneman, Lennard Hendriks, Mona De Boer, Bert-Jan Butijn

1st Edition

3031110889, 978-3031110887

More Books

Students also viewed these Accounting questions