You are the group management accountant of a large divisionalized group.
There has been extensive board discussion of the existing system of rewarding Divisional General Managers with substantial bonuses based on the comparison of the divisional profit with budget.
The scheme is simple: the divisional profit (PBIT) is compared with the budget for the year. If budget is not achieved no bonus is paid. If budget is achieved a bonus of 20 per cent of salary is earned. If twice budgeted profit is achieved, a bonus of 100 per cent of salary is paid, which is the upper limit of the bonus scheme. Intermediate achievements are calculated pro rata.
The finance director has been asked to prepare a number of reports on the issues involved, and has asked you to prepare some of these.
He has decided to use the results for Division X as an example on which the various discussions could be based. A schedule of summary available data is given below.

Division X manufactures and sells branded consumer durables in competitive markets. High expenditure is required on product development and advertising, as the maintenance of market share depends on a flow of well-promoted new models.
Reliable statistics on market size are available annually. Bas on the market size for 2012, where stronger than anticipated growth had occurred, a revised market estimate of 165 000 units for 2013 is agreed by group and divisional staff in May 2013. This is a significant increase on the estimate of 150 000 units made in May 2012 and used since.
The divisional general manager has commented that action now, almost half way through the year, is unlikely to produce significant results during this year. However, had he known last year, at the time of producing the budget, that the market was growing faster, he could have taken the necessary action to maintain the strategic plan market share. The actions would have been:
€¢cutting prices by £10 per unit below the price at present charged and used in the latest estimate for 2013;
€¢increasing marketing expenditure by £300 000 compared with the strategic plan.
The group managing director, commenting on the same data, said that the divisional general manager could have maintained both strategic plan market share and selling prices by an alternative approach.
The approach, he thought, should have been:
€¢maintaining expenditure on product development and marketing at 20 per cent of sales over the years;
€¢spending his time controlling production costs instead of worrying about annual bonuses.
(a) To analyze and comment on the results of Division X, making appropriate comparisons with Budget, with Plan and with new available data. Present the results in such a form that the Board can easily understand the problems involved;
(b) To comment on the advantages and problems of the existing bonus system for the Divisional General Manager and the way in which the present bonus scheme may motivate the Divisional General Manager;
(c) To make specific proposals, showing calculations if appropriate, for an alternative bonus scheme, reflecting your analysis in (a).
A non-executive director has commented that he can understand the case for linking executive directors' rewards to group results. He is not convinced that this should be extended to divisional managers, and certainly not to senior managers below this level in divisions and head office.
(d) Explain and discuss the case for extending bonus schemes widely throughout the organization.

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Division > Summary of management accounting data Latest estimate 2013 Strategic plan 2013 Prepared Aug 2012 Budget 2013 Prepared Prepared Oct 2012 Apil 2013 Sales of units by DivisionX Sales Marginal costs Fixed factory cost Product development Marketing PBIT 35 000 28 000 14 350 6500 2000 3 500 1 650 36 000 28 800 15 300 6 800 2000 3 200 1 500 35 800 28 100 14 900 7 200 1400 2 600