|
Cars |
motor cycles |
scooters |
suvs |
TOTAL |
|
|
|
|
|
|
| Sales |
1,000.00 |
1,200.00 |
1,500.00 |
3,000.00 |
6,700.00 |
| Unit level costs |
280.00 |
375.00 |
490.00 |
1,420.00 |
2,565.00 |
| Batch level costs |
200.00 |
320.00 |
410.00 |
590.00 |
1,520.00 |
| Division specific capacity related costs |
100.00 |
150.00 |
180.00 |
350.00 |
780.00 |
| Divisional income |
420.00 |
355.00 |
420.00 |
640.00 |
1,835.00 |
| Allocation of corporate charges |
234.00 |
281.00 |
351.00 |
703.00 |
1,569.00 |
| Final Divisional net income |
186.00 |
74.00 |
69.00 |
- 63.00 |
266.00 |
|
|
|
|
|
|
|
|
|
|
|
|
| part a |
|
|
|
|
|
| Assumption : Allocation of Corporate charges is considered as Fixed Cost |
|
|
|
|
|
Cars |
motor cycles |
scooters |
suvs |
TOTAL |
|
|
|
|
|
|
| Sales |
1,000.00 |
1,200.00 |
1,500.00 |
|
3,700.00 |
| Unit level costs |
280.00 |
375.00 |
490.00 |
|
1,145.00 |
| Batch level costs |
200.00 |
320.00 |
410.00 |
|
930.00 |
| Division specific capacity related costs |
100.00 |
150.00 |
180.00 |
|
430.00 |
| Divisional income |
420.00 |
355.00 |
420.00 |
- |
1,195.00 |
| Allocation of corporate charges |
424.32 |
509.19 |
636.49 |
- |
1,570.00 |
| Final Divisional net income |
- 4.32 |
- 154.19 |
- 216.49 |
- |
- 375.00 |
|
|
|
|
|
|
| % to Sales |
27% |
32% |
41% |
|
1.00 |
The managers of each division are evaluated on their divisional net income which includes an allocation of corporate charges.
Corporate charges are allocated to each division based on relative sales. Each division is paid a yearly bonus on their final divisiional net income
If the final divisional income for a division exceeds 10% of sales they receive a percentage of the bonus pool.
The company is considering discontinuing the SUV line due to continuous operating losses over the last five years.
a) discuss whther discontiuniuing the perfume line will improve profitability. What other factors need to be considered before this decision is made.
b) discuss the appropriateness of using final divisional net income as the basis for bonus compensation. Should corporate charges be included in evaluating a divisons performance.
c) recommend changes to evaluation of managers for incentive compensation