Watson Company pays a bonus to any of its five division managers who increase their percentage of income to sales over that of the year before. The manager of Division A is displeased because of the results of operations of the line for the current year. The division showed a decrease in net income percentage, as follows:
Current Year Last Year
Net sales $252,000 $216,000
Cost of goods sold
Division fixed costs $29,000 $29,000
Allocated costs $40,000 $19,000
Variable costs $72,000 $141,000 $72,000 $120,000
$111,000 $96,000
Gross margin
Selling and administrative expense
Division fixed expenses $25,000 $22,000
Allocated expenses $45,000 $37,000
Variable expenses $22,000 $92,000 $19,000 $78,000
Income $19,000 $18,000

The items of allocated costs and expenses represent general cots and expenses of the company that were allocated to the divisions.

Required:

a. Prepare a statement that shows more clearly the performance of Division A.
b. Comment on the method used by the company to calculate bonuses.

We will calculate the controllable margin to understand clearly the performance of Division A

It is calculated after deducting the controllable costs. Increase

Current Year Last Year
Net sales $252,000 $216,000
Cost of goods sold
Division fixed costs $29,000 $29,000
Variable costs $72,000 $72,000

Selling and administrative expense
Division fixed expenses $25,000 $22,000
Variable expenses $22,000 $19,000
Controllable Margin $104,000 $74,000 41%

Thus the performance of A is better in the current year as the Controllable margin of $104000 is more than last year of $74000. It has increased by 41%

The method of the company is not appropriate as the income is calculated after deducting the uncontrollable costs.
This does not correctly indicate the performance of the division as they are not