BProblemsChapter 25-1 - Problem 25-2 Watson Company a...

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Problem 25-2: Watson Company a. Performance Report Division A Current Year Last Year Net sales .......................................................................................................................................................................... $252,000 $216,000 Cost of goods sold: Variable costs .............................................................................................................................................................. $72,000 $72,000 Division fixed costs ..................................................................................................................................................... 29,000 101,000 29,000 101,000 Gross margin ................................................................................................................................................................... 151,000 115,000 Selling and administrative expenses: Variable expense ......................................................................................................................................................... 22,000 19,000 Division fixed expenses .............................................................................................................................................. 25,000 47,000 22,000 41,000 Contribution to allocated costs and expenses ................................................................................................................... $104,000 $ 74,000 b. Division A performed better in the current year than in the last year when the ratios of contribution to allocated costs to sales are made. ($104,000/$252,000 = 41% and $74,000/$216,000 = 34%.) Division managers cannot control allocated costs, and their performance should not be judged on the basis of net income/sales because the net income figure includes allocated costs. By comparing division contributions to allocated costs, the amount which each Division Manager contributes toward the overall company profits can be clearly seen. Bonuses based on division contributions would be in the best interest of both the managers and the company.
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