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The following data are taken from the management accounting reports of Dancer Co.:

Div. A Div. B Div. C
Income from operations $1,800,000 $1,350,000 $1,350,000
Total service department charges 1,700,000 1,050,000 1,100,000

If an incentive bonus is paid to the manager who achieved the highest income from operations before service department charges, it follows that: _________

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Answer:

Dancer Co.

If an incentive bonus is paid to the manager who achieved the highest income from operations before service department charges, it follows that: _________

Division A's manager will be rewarded, whereas the manager did not achieve the best results.

Explanation:

a) Data and Calculations:

                                                           Div. A             Div. B           Div. C

Income from operations               $1,800,000  $1,350,000  $1,350,000

Total service department charges 1,700,000    1,050,000     1,100,000

Departmental net income               $100,000    $300,000    $250,000

b) The incentive bonus is based on a performance reporting line that is above the bottom-line.  It is the bottom-line figure that affects the company.  The performance of a division should not be judged solely on a line above the bottom-line.  The departmental charges are allocated costs for services consumed during a financial period.  They must be taken into account before deciding on an incentive bonus.

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