Reference no: EM13504235

	Cars	motor cycles	scooters	suvs	TOTAL
Sales	1,000.00	1,200.00	1,500.00	3,000.00	6,700.00
Unit level costs	280.00	375.00	490.00	1,420.00	2,565.00
Batch level costs	200.00	320.00	410.00	590.00	1,520.00
Division specific  capacity related costs	100.00	150.00	180.00	350.00	780.00
Divisional income	420.00	355.00	420.00	640.00	1,835.00
Allocation of corporate charges	234.00	281.00	351.00	703.00	1,569.00
Final  Divisional  net income	186.00	74.00	69.00	-       63.00	266.00
part a
Assumption : Allocation of Corporate charges is considered as Fixed Cost
	Cars	motor cycles	scooters	suvs	TOTAL
Sales	1,000.00	1,200.00	1,500.00		3,700.00
Unit level costs	280.00	375.00	490.00		1,145.00
Batch level costs	200.00	320.00	410.00		930.00
Division specific  capacity related costs	100.00	150.00	180.00		430.00
Divisional income	420.00	355.00	420.00	-	1,195.00
Allocation of corporate charges	424.32	509.19	636.49	-	1,570.00
Final  Divisional  net income	-                                               4.32	-           154.19	-        216.49	-	-     375.00
%  to Sales	27%	32%	41%		1.00

The managers of each division are evaluated on their divisional net income which includes an allocation of corporate charges.

Corporate charges are allocated to each division based on relative sales. Each division is paid a yearly bonus on their final divisiional net income

If the final divisional income for a division exceeds 10% of sales they receive a percentage of the bonus pool.

The company is considering discontinuing the SUV line due to continuous operating losses over the last five years.

a) discuss whther discontiuniuing the perfume line will improve profitability. What other factors need to be considered before this decision is made.

b) discuss the appropriateness of using final divisional net income as the basis for bonus compensation. Should corporate charges be included in evaluating a divisons performance.

c) recommend changes to evaluation of managers for incentive compensation