Stuart Corporation has three divisions, each operating as a responslbility cente
ID: 2550451 • Letter: S
Question
Stuart Corporation has three divisions, each operating as a responslbility center. To provide an incentive for divisional executive officers, the company gives divisional management a bonus equal to 15 percent of the excess of actual net income over budgeted net Income. The following is Atlantic Divislon's current year's performance: Sales revenue Cost of goods sold Gross profit Selling&administrative; expenses Net income current Year $4,090,000 2,320,000 1,770,000 710,000 $1,060,000 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 dlvision'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. Requirec a. Prepare the budgeted income statement based on Atlantic Division's proposal of a 4 percent increase. b-1. Prepare income statement with 9% growth. b-2. If growth is actually 9 percent as usual, how much bonus would Atlantic Division's executive officers recelve if the president had approved the dlvision'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 executve officers recelve since the president imposed a 14 percent increase? Complete this question by entering your answers in the tabs below Req A Req B1 Req B2 Reqs C and D Prepare the budgeted income statement based on Atlantic Division's proposal of a 4 percent increase. STUART CORPORATION Budgeted Income Statement Sales revenue Cost of goods sold Gross profit Selling & administrative expenses Net incomeExplanation / Answer
Answer a)
Budgeted Income statement at 4% increase:
Answer b)
Income Statement with 9% growth:
If actual growth is 9%, increase in actual net income over budgted net income is 53,000 (1,155,400 - 1,102,400)
Bonus to be received by Atlantic Divisions's executive officers = 15% of 53,000 = 7,950
Answer c)
Budgeted Income statement at 14% increase:
Answer d)
If the actual result turns out to be 9% increase as against budgted increase of 14%, there is no increase in net income over budgeted and hence no bonus will be given to Atlantic Divisions's executive officers.
Current Year Budgted Sales Revenue 40,90,000 42,53,600 Cost of Goods Sold 23,20,000 24,12,800 Gross Profit 17,70,000 18,40,800 Selling & Admin Cost 7,10,000 7,38,400 Net Income 10,60,000 11,02,400