Adams 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 20 percent of the excess of actual net income over budgeted net income. The following is Atlantic Division’s current year’s performance. Current Year Sales revenue $ 4,080,000 Cost of goods sold 2,410,000 Gross profit 1,670,000 Selling & administrative expenses 890,000 Net income $ 780,000 The president has just received next year’s budget proposal from the vice president in charge of Atlantic Division. The proposal budgets a 4 percent increase in sales revenue with an extensive explanation about stiff market competition. The president is puzzled. Atlantic has enjoyed revenue growth of around 9 percent for each of the past five years. The president had consistently approved the division’s budget proposals based on 4 percent growth in the past. This time, the president wants to show that he is not a fool. “I will impose a 14 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 4 percent increase. b-1. Prepare income statement with 9 percent growth. b-2. If growth is actually 9 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 14 percent increase the president imposed. d. If the actual results turn out to be a 9 percent increase as usual, how much bonus would Atlantic Division’s executive officers receive since the president imposed a 14 percent increase?
Adams 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 20 percent of the excess of actual net income over budgeted net income. The following is Atlantic Division’s current year’s performance.
| Current Year | |||||
| Sales revenue | $ | 4,080,000 | |||
| Cost of goods sold | 2,410,000 | ||||
| Gross profit | 1,670,000 | ||||
| Selling & administrative expenses | 890,000 | ||||
| Net income | $ | 780,000 | |||
The president has just received next year’s budget proposal from the vice president in charge of Atlantic Division. The proposal budgets a 4 percent increase in sales revenue with an extensive explanation about stiff market competition. The president is puzzled. Atlantic has enjoyed revenue growth of around 9 percent for each of the past five years. The president had consistently approved the division’s budget proposals based on 4 percent growth in the past. This time, the president wants to show that he is not a fool. “I will impose a 14 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
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a. Prepare the
budgeted income statement based on Atlantic Division’s proposal of a 4 percent increase. -
b-1. Prepare income statement with 9 percent growth.
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b-2. If growth is actually 9 percent as usual, how much bonus would Atlantic Division’s executive officers receive if the president had approved the division’s proposal?
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c. Prepare the budgeted income statement based on the 14 percent increase the president imposed.
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d. If the actual results turn out to be a 9 percent increase as usual, how much bonus would Atlantic Division’s executive officers receive since the president imposed a 14 percent increase?
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