Problem $7-16$A Behavioral impact of budgeting

Amherst 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 Atlantic Division's current year's performance.

The president has just received next year's budget proposal from the vice president in charge of Atlantic Division. The proposal

budgets a $5$ percent increase in sales revenue with an extensive explanation about stiff market competition. The president is puzzled.

Atlantic has enjoyed revenue growth of around $10$ percent for each of the past five years. The president had consistently approved the

division's 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 Atlantic Division's proposal of a $5$ percent increase.

b$.$ If growth is actually $10$ percent as usual, how much bonus would Atlantic Division's executive officers receive if the president had

approved the division's 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 Atlantic Division's executive officers

receive since the president imposed a $15$ percent increase?

e$.$ Propose a better budgeting procedure for Amherst Corporation.