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2. Acme Company manufactures a variety of industrial products sold throughout the United States. Jim Beam has been manager of Central Division for the past three years. In years 2 and 3, he was able to qualify for an annual bonus of $100,000 by meeting a target growth rate of 10% of gross sales. Income statements for the division (in $thousands):

Year 1 Year 2 Year 3

Gross sales 40,200 45,300 50,500

Returns and allowances 250 310 400

Net sales 39,950 44,990 50,100

COGS 23,170 28,300 33,000

Gross profit 16,780 16,690 17,100

Expenses:

Sales commissions 4,020 4,530 5,050

Manager salary/bonus 250 350 350

Advertising 560 780 975

Other division overhead 2,850 3,290 4,130

General and administrative 8,040 9,060 10,100

15,720 18,010 20,605

Net income/loss 1,060 (1,320) (3,505)

All advertising and other division overhead is local to the division and controlled by the manager. General and administrative expense represents corporate overhead which is allocated at the rate of 20% of gross sales.

Required:

Because Central Division is showing increasing losses, a senior vice president has suggested that the division be closed. Comment on the advisability of this plan.

Comment on the effectiveness of the bonus plan used by Acme. Provide evidence in support of your comments.

How might the bonus plan be revised to be more effective?

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