Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Stuart Corporation has three divisions, each operating as a responsibility center. To provide an incentive for divisional executive officers, the company gives divisional management a

Stuart 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 16 percent of the excess of actual net income over budgeted net income. The following is Atlantic Divisions current years performance.

Current Year
Sales revenue $ 4,000,000
Cost of goods sold 2,310,000
Gross profit 1,690,000
Selling & administrative expenses 850,000
Net income $ 840,000

The president has just received next years 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 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 Atlantic Divisions proposal of a 5 percent increase.

b-1. Prepare income statement with 10 percent growth.

b-2. If growth is actually 10 percent as usual, how much bonus would Atlantic 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 Atlantic Divisions executive officers receive since the president imposed a 15 percent increase?

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

Step: 3

blur-text-image

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

Leading The Internal Audit Function

Authors: Lynn Fountain

1st Edition

0367568004, 9780367568009

More Books

Students also viewed these Accounting questions

Question

Understand the nature and importance of collective bargaining

Answered: 1 week ago