Elba Consulting Associates (ECA) is organized into three divisions (Manufacturing, Retail, and Entertainment). Many support services, such
Question:
Elba Consulting Associates (ECA) is organized into three divisions (Manufacturing, Retail, and Entertainment). Many support services, such as human resources, legal, and information technology, are provided by corporate staff. The corporate staff costs are allocated to the divisions based on divisional revenue. The resulting divisional operating profit (computed as divisional revenues less divisional direct costs less corporate cost allocations) is used to evaluate and compensate all division managers. The compensation plan consists of a fixed salary plus a bonus, which depends on the actual divisional operating profit compared to the target profit. The fixed salary for all three division managers is $500,000. The bonus consists of two parts. First, there is a “target bonus,” which is a flat $25,000 for meeting the operating profit target. Second, there is an “incentive bonus,” which is equal to 0.2% of salary for every thousand dollars of operating profit in excess of the target. The bonus amounts are not included in divisional operating profits.
Partial target and actual results for the most recent year were as follows:
The target and actual corporate costs for the most recent year were as follows:
Required
a. What are the target operating profits in each division for the most recent year after the corporate costs are allocated?
b. What are the reported (actual) operating profits in each division for the most recent year after the corporate costs are allocated?
c. What is the total bonus that will be paid to each of the three managers? How does this compare to the bonus that would be paid if performance was at the target level?
d. Comment on the results from requirements (a) through (c).
Step by Step Answer:
a All financial numbers in thousands of dollars b All financial numbers in thousands of dollars c Al...View the full answer
