Problem 14-16A (Algo) Behavioral impact of budgeting LO 14-1

Rooney Corporation has three divisions, each operating as a responsibility center. To provide an incentive for divisional executive officers, the company gives divisional management a bonus equal to 16 percent of the excess of actual net income over budgeted net income. The following is Atlantic Divisions current years performance.

	Current Year
Sales revenue		$	4,180,000
Cost of goods sold			2,460,000
Gross profit			1,720,000
Selling & administrative expenses			740,000
Net income		$	980,000

The president has just received next years budget proposal from the vice president in charge of Atlantic Division. The proposal budgets a 4 percent increase in sales revenue with an extensive explanation about stiff market competition. The president is puzzled. Atlantic has enjoyed revenue growth of around 9 percent for each of the past five years. The president had consistently approved the divisions budget proposals based on 4 percent growth in the past. This time, the president wants to show that he is not a fool. I will impose a 14 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 Divisions proposal of a 4 percent increase.

b-1. Prepare income statement with 9 percent growth.

b-2. If growth is actually 9 percent as usual, how much bonus would Atlantic Divisions executive officers receive if the president had approved the divisions proposal?

c. Prepare the budgeted income statement based on the 14 percent increase the president imposed.

d. If the actual results turn out to be a 9 percent increase as usual, how much bonus would Atlantic Divisions executive officers receive since the president imposed a 14 percent increase?

Complete this question by entering your answers in the tabs below. Prepare the budgeted income statement based on Atlantic Division's proposal of a 4 percent increase. Prepare the budgeted income statement based on the 14 percent increase the president imposed. If the actual results turn out to be a 9 percent increase as usual, how much bonus would Atlantic Division's executive officers receive since the president imposed a 14 percent increase? Complete this question by entering your answers in the tabs below. Prepare income statement with 9 percent growth. If growth is actually 9 percent as usual, how much bonus would Atlantic Division's executive officers receive if the president had approved the division's proposal