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- Acme Company manufactures a variety of industrial products which are sold throughout the country. Fred Riley has been manager the Eastern Branch of Acme Company for the past three years. Starting in year 2, he was able to qualify for a $50,000 annual bonus for meeting a target growth rate of 10% of gross sales. Income statements for Eastern for the three year period are given below. Amounts are in the $ thousands.
|
Year 1 |
Year 2 |
Year 3 |
|||
|
Gross sales |
20,300 |
22,400 |
24,800 |
||
|
Returns and allowances |
150 |
320 |
480 |
||
|
Net sales |
20,150 |
22,080 |
24,320 |
||
|
COGS |
13, |
100 |
15,020 |
17,170 |
|
|
Gross margin |
7,050 |
7,060 |
7,150 |
||
|
Operating expense: |
|||||
|
Manager salary/bonus |
|||||
|
Other branch overhead |
840 |
870 |
910 |
||
|
Selling expense |
1,020 |
1,190 |
|||
|
Advertising |
530 |
750 |
|||
|
General and admin |
4,060 |
4,480 |
4,960 |
||
|
Total |
6370 |
7270 |
8120 |
||
|
Branch Income |
680 |
-210 |
-970 |
All advertising is local to the branch, and is controlled by the manager. Selling expense is all such expenses other than advertising, such as sales staff compensation and travel. General and administrative expense represents corporate overhead which is allocated at the rate of 20% of gross sales.
Required:
1) Comment on the effectiveness of the bonus plan used by Acme.
2) Because Eastern Branch is showing increasing losses, a senior vice president has suggested that the branch be closed. Comment.
