Wasley has three operating divisions. Each manager of a division is evaluated on that division€™s total operating income. Managers are paid 10 percent of operating income as a bonus.
The AB division makes products A and B. The C division makes product C. The D division makes product D. All four products use only direct labor and direct materials. However, a fixed (unavoidable) $ 1,784 corporate overhead is applied to each division (or product) based on direct labor dollars. In the following operating income statement for the first quarter of the year all numbers are in 000s.

Required:
a. Allocate the corporate overhead and compute divisional operating income (after allocating corporate overhead) for each of the three divisions.
b. One day the manager of the AB division, Shirley Chen, announces that starting in the second quarter she will be discontinuing product B ( replacing it with nothing and letting the labor go, cutting all direct costs attributable to the product). She reasons that product B is losing money for her division and the company. Recompute first-quarter operating income for both division AB and the corporation without division AB€™s product B (as though the manager had already dropped product B).
c. Is Shirley Chen, the manager of the AB division, better off this way? Why or why not?
d. Is the corporation better off this way? Why or why not?
e. What problems do you see with the reporting/ evaluation/ incentive system currently inplace?

Transcribed Image Text:

Income Statement Product A Product B Product C Product L Net s Direct labor Direct materials Corporate overhead $1,250 450 250 $850 600 $1,250 540 125 $1.650 640 160