Performance of Divisional Managers at Leakproof Faucet Corporation Is Evaluated

question 101

Essay

Performance of divisional managers at Leakproof Faucet Corporation is evaluated based on the operating incomes of the divisions. Abbreviated income statements for the year ending 2019 are shown below for the three divisions of Leakproof Faucet Corp: $\begin{array}{lrrrr} & \text { Newton } & \text { Granite } & \text { Longview } & \text { Totals } \\\text { Revenues (in thousands) } & \$ 2,500 & \$ 1,250 & \$ 1,500 & \$ 5,250 \\\text { COGS } & 1.300 & 575 & 600 & 2,475\\\hline \text { Gross Margin } & 1,200 & 675 & 900 & 2,775 \\\text { Division Overhead } & 250 & 125 & 150 & 525 \\\text { Corporate Overhead* } & 524 & 262 & 314 & 1,100 \\\text { Operating Incomes } & 426 & 288 & 436 & 1,150\end{array}$ *Total Corporate Overhead is allocated to each division based on the division's proportion of total revenues.
The manager of the Newton division, through increases in manufacturing efficiency, created some additional capacity in 2019. The only way he could have utilized this capacity would have been to manufacture a model J-5 faucet, which would have had the following impact on the Newton division:
Increase in annual revenues (in thousands) of $750.
Increase in cost of goods sold of $600.
Increase in division overhead of $100.

Mr. Garrett, the Newton division manager, chose not to manufacture the J-5 faucets; therefore, the additional capacity went unused.
Required:
(1) Prepare revised income statements for the three divisions for 2019 assuming that Mr. Garrett had chosen instead to utilize the additional capacity to manufacture the model J-5.
(2) Calculate the contribution margin of the Newton division if J-5 is manufactured and if it is not manufactured.
(3) Why did Mr. Garrett choose not to manufacture the J-5?
(4) Would Leakproof Faucets have benefited from the manufacture of the J-5?
(5) Identify an advantage and a disadvantage of not allocating any corporate overhead to the divisions.

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Definitions:

Semifluid Matrix

A viscous, semi-liquid substance found within various biological systems, such as the cytoplasm of a cell, providing a medium for cellular processes.

Dermis

The layer of dense connective tissue beneath the epidermis in the skin of vertebrates.

Digestive Tract

A continuous, hollow passage starting from the mouth to the anus through which food is ingested, digested, absorbed, and waste material expelled.

Blood Vessels

Blood vessels are tubular structures in the circulatory system that transport blood throughout the body, including arteries, veins, and capillaries.