Question

Vernon 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. Sales revenue Cost of goods sold Gross profit Selling & administrative expenses Net income Current Year $4,110,000 2,480,000 1,630,000 760,000 $ 870,000 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?

Answer 1

Part a
VERNON CORPORATION
Budgeted Income Statement
Sales Revenue	$4,274,400
Cost of goods sold	$2,579,200
Gross Profit	$1,695,200
Selling & administrative expenses	$790,400
Net Income	$904,800
Part b.1
VERNON CORPORATION
Budgeted Income Statement
Sales Revenue	$4,479,900
Cost of goods sold	$2,703,200
Gross Profit	$1,776,700
Selling & administrative expenses	$828,400
Net Income	$948,300
Part b.2
Excess Net Income with 9% growth =$948,300 - $904,800 =$43,500
Bonus =$43,500*17% =$7,395
Part c & d
VERNON CORPORATION
Budgeted Income Statement
Sales Revenue	$4,685,400
Cost of goods sold	$2,827,200
Gross Profit	$1,858,200
Selling & administrative expenses	$866,400
Net Income	$991,800
Bonus	NIL
Since the President has imposed the Budget on a 14% increase then the Budgeted Income will be higher than the Actual Net Income
which has grown at 9%, Hence there will be NO Bonus