GOG produces 4 prodcts in three operating divisions. The yellow division produce
ID: 2454033 • Letter: G
Question
GOG produces 4 prodcts in three operating divisions. The yellow division produces stars and moons, the green division produces clovers, and the pink division produces hearts. The manager of each division is evaluated based on total operating income and receives a bonus equal to 10% of the total operating income.
Each of the products has direct costs of materials and labor. In addition to these costs, each product is allocated a portion of the $1,800,000 in fixed corporate overhead bsed on direct labor dollars.
The most recent year operating results are presender below
At the first meeting of the division managers the following year, the yellow division manager announces his plan to discontinue the moons product as it is losing money not only for his division, but for the company as a whole. The labor force will be let go, thus cutting all direct costs. No replacement product is planed.
a) Is this the best decision for the company?Is the the best decision for the yellow division manager?Support your answer with computations( recalculate the divisional operating income without the moons product.).
b) Is there a problem with the current evaluation/incentive system? What changes would you suggest?
stars moons clovers hearts net sales 1,250,000 850,000 1,250,000 1,650,000 direct materials (250,000) (50,000) (125, 000) (160,000) direct labor (450,000) (600,000) (540, 000) (640, 000) fixed overhead (363,229) (484,305) (435,874) (516,592) operating income 186,771 (284,305) 149,126 333,408Explanation / Answer
total contribution of the company = 2185000
less: corporate fixed costs = 1800000
net profit = 385000
so it is clear from the above ratiosthe moons are giving 23.5% contribution
so the decison of yellow division manager is wrong, as the fixed costs are allocated to all products on a blancket rate this leads to loss in the moons, so to resolve this the fixed costs must be allocated on ABC costing method
net profit woth out MOONs
total contribution of the company = 1985000
less: corporate fixed costs = 1800000
net profit = 185000
so it is clear that the net profit is reduced by $ 200000
so the decision of yellow division manager is benefit to him only not loss to the company
B) yess , as the fixed costs are allocated to all products on a blancket rate this leads to loss in the moons, so to resolve this the fixed costs must be allocated on ABC costing method,
or if the fixed costs are not directly lincked to the divisons they must not be allocated to the products for the evaluation of the products
i suggest to implement contribution as the basis for incentive calculations , so that automitacally the net profit of the company will increase
s no particulars stars moons clovers hearts 1 net sales 1250000 850000 1250000 1650000 2 direct matereial 250000 50000 125000 160000 3 direct labour 450000 600000 540000 640000 4 contribution(1-2-3) 550000 200000 585000 850000 5 contribution to sales ratio 44% 23.5% 46.8% 51.51%Related Questions
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