To ensure the continuity of their business, the management of Family Smallgoods has acquired two similar businesses. After the merger, Family Smallgoods consists of three divisions: Melbourne West (the original business), North Melbourne (acquired business) and Regional Victoria (acquired business). The management of Family Smallgoods is faced with a difficult task of integrating the three businesses into one, and, therefore, they employed you to help them with this task. One of the first issues they would like you to analyse are the bonus structures. The manager of the North Melbourne division receives a bonus based on monthly sales in excess of monthly budgeted sales of $950,000, whereas the manager of the Melbourne West division receives a bonus based on profit in excess of budgeted net profit. The budgeted monthly sales revenue for the Melbourne West division is $1,060,000. The manager of the Regional Victoria division has never participated in any bonus scheme. The company's profit goal for each division is 12 percent of sales. The management has provided you with the following additional information:

a) At the Melbourne West division, sales were $,1,200,000, while sales at the North Melbourne were 12.5% lower and at the Regional Victoria were 37.5% lower than at the Melbourne division. The costs of goods sold in both Melbourne West and North Melbourne divisions was 42% of sales, but at the Regional Victoria division was 43% of sales.

b) Variable selling expenses (sales commissions) were 6 percent of sales for all divisions, while variable administrative expenses were 2.5 percent of sales for all divisions.

c) Regular maintenance and cleaning costs were incurred as follows: Melbourne West, $1,200; North Melbourne, $15,000; and Regional Victoria, $9,000. The division manager has complete control over this outlay.

d) The Melbourne West division spent $10,000 for advertising. The North Melbourne division spent 10 times the amount spent in the Melbourne West division on advertising. The Regional Victoria spent $40,000 on advertising. Advertising is completely under the control of each division manager.

e) The rental expense at the Melbourne West division was $90,000, whereas for the North Melbourne was $150,000. The rent expense for the Regional Victoria was $60,000.

f) General and administrative expenses were incurred by each division as follows:

Melbourne West - $254,000

North Melbourne - $236,000

Regional Victoria - $200,000

Required:

1. Present a profitability statement for Family Smallgoods Ltd Pty, and for the Melbourne West, North Melbourne and Regional Victoria divisions. 5 marks

2. Discuss the impact of the bonus structure on the manager's behaviour, and also the effect of their behavior on the divisions' financial results.

3. You also discovered some unexplained expenditures as miscellaneous expenses in the North Melbourne division's profit and loss report. After making some inquiries, you were told that when the financial controller realised that the North Melbourne division's manager had spent too much on advertising, he reclassified $50,000 of advertising and buried them in rent and other costs. Is the financial controller in breach of the International Code of Ethics for Professional Accountants - Integrity; Objectivity; Professional Competence and Due Care; Confidentiality and Professional Behaviour?