Campbell Corporation has three divisions, each operating as a responsibility cen

ID: 2553266 • Letter: C

Question

Campbell Corporation has three divisions, each operating as a responsibility center. To provide an Incentive for divisional executive officers, the company glves divisional management a bonus equal to 18 percent of the excess of actual net Income over budgeted net ncome. The following is Atlantic DMision's current year's performance Current Year Sales revenue Cost of goods sold Gross profit Selling & administrative expenses Net income 4,848,8ee 2,418,8ee 798,8e8 $ 848,8e8 The president has just recelved next year's budget proposal from the vice president In charge of Atlantic DIvision. The proposal budgets a 3 percent Increase In sales revenue with an extenslve explanation about stiff market competition. The president Is puzzled. Atlantic has enjoyed revenue growth of around 8 percent for each of the past five years. The president had consistently approved the division's budget proposals based on 3 percent growth in the past. This time, the president wants to show that he is not a fool. ? WII Impose a 13 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 DivsIon's proposal of a 3 percent Increase. b-1. Prepare income statement with 8% growth. b-2. If growth is actually 8 percent as usual, how much bonus would Atlantic Division's executive officers receive if the president had approved the divislon's proposal? c. Prepare the budgeted Income statement based on the 13 percent Increase the presldent Imposed. d. If the actual results turn out to be a 8 percent Increase as usual, how much bonus would Atlantic Divislon's executive officers recelve slnce the president Imposed a 13 percent Increase?

Explanation / Answer

Solution

CAMPBELL CORPORATION

INCOME STATEMENT (with 8% growth)

Particulars

Amount ($)

Sales revenue(WN 1)

4,363,200

Cost of goods sold(WN2)

2,602,649

Gross Profit

1,760,551

Selling and administrative expenses

853,006

Net Income

907,545

Working Note (WN): Given that cost of goods sold and selling and administrative expenses remain stable in proportion to sales.

(1)Sales revenue

= $ 4,040,000 + 8% of $ 4,040,000

= $ 4,363,200

(2)Cost of goods sold

As per given data= $ 2,410,000 / $ 4,040,000 X100= 59.65 %

So, Cost of goods sold is 59.65 % of sales.

For 8% growth cost of goods sold = $ 4,363,200 X 59.65 % =$ 2,602,649

(3) Selling and administrative expenses

As per given data= $ 790,000 / $ 4,040,000 X100= 19.55 %

So, selling and administrative expense is 19.55 % of sales.

For 8% growth selling and administrative expense = $ 4,363,200 X 19.55 % =$ 853,006