Fanning Corporation has three divisions, each operating as a responsibility cent
ID: 2565943 • Letter: F
Question
Fanning 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 17 percent of the excess of actual net income over budgeted net income. The following is Atlantic Division’s current year’s performance:
The president has just received next year’s 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 division’s 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 Division’s proposal of a 5 percent increase.
b-1. Prepare income statement with 10% growth.
b-2. If growth is actually 10 percent as usual, how much bonus would Atlantic Division’s executive officers receive if the president had approved the division’s 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 Division’s executive officers receive since the president imposed a 15 percent increase?
Current Year Sales revenue $ 4,190,000 Cost of goods sold 2,480,000 Gross profit 1,710,000 Selling & administrative expenses 760,000 Net income $ 950,000Explanation / Answer
Current Year % of sales Sales revenue 4,190,000 Cost of goods sold 2,480,000 59.19 Gross profit 1,710,000 Selling & administrative expenses 760,000 18.14 Net income 950,000 Ans a Budgeted Income statement 5% increase Sales revenue (4190000*105%) 4399500 Cost of goods sold (4399500*59.19%) 2604000 Gross profit 1795500 Selling & administrative expenses 798000 Net income 997500 ans b1 Budgeted Income statement 10% increase Sales revenue (4190000*110%) 4609000 Cost of goods sold 2728000 Gross profit 1881000 Selling & administrative expenses 836000 Net income 1045000 ans b2 Bonus=17%*(1045000-997500) 8075 ans b3 Budgeted Income statement 15% increase Sales revenue (4190000*115%) 4818500 Cost of goods sold 2852000 Gross profit 1966500 Selling & administrative expenses 874000 Net income 1092500 ans b4 Bonus=17%*(1092500-1045000) 8075
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