P $7-7$: Wasley

Wasley has three operating divisions. Each manager of a division is evaluated on that division's total

operating income. Managers are paid $10$ percent of operating income as a bonus.

The AB division makes products A and B $.$ The C division makes product C $.$ The D division makes

product D$.$ All four products use only direct labor and direct materials. However, a fixed $($unavoidable$)$

$$1,784$ corporate overhead is applied to each division $($or product$)$ based on direct labor dollars. In the

following operating income statement for the first quarter of the year, all numbers are in $000$ s $.$

Required:

a$.$ Allocate the corporate overhead and compute divisional operating income $($after allocating corporate overhead$)$ for each of

the three divisions.

b$.$ One day, the manager of the AB division, Shirley Chen, announces that starting in the second quarter she will be

discontinuing product B $($replacing it with nothing and letting the labor go$,$ cutting all direct costs attributable to the

product$).$ She reasons that product B is losing money for her division and the company. Recompute first$-$quarter

operating income for both division AB and the corporation without division AB $\text{'}$s product B $($as though the

manager had already dropped product B $).$

c$.$ Is Shirley Chen, the manager of the AB division, better off this way? Why or why not?

d$.$ Is the corporation better off this way? Why or why not?

e$.$ What problems do you see with the reporting$/$evaluation$/$incentive system currently in place?

f$.$ What would you suggest as a more appropriate allocation base than direct labor, and why would it be more appropriate?