Cost Allocation and Compensation Performance of divisional managers at Leakproof Faucet Corporation is judged by an evaluation of the operating incomes of the divisions.Abbreviated income statements for the year ending 2010 are shown below for the three divisions of Leakproof Faucet Corp:

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* 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 2010.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 divisional 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 2010 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.
Please see Feedback for answers.
 Feedback: (1) 11ea6e70_bd99_fef2_8f54_fd7f8b860311_TB1699_00 * $596 = ($3,250/$6,000)x $1,100
(2) 11ea6e70_bd99_fef3_8f54_d1d8ef2c47fd_TB1699_00 (3)Manufacturing the J-5 would have increased the Newton division's share of the corporate overhead by $72,000 ($596,000 - $524,000),whereas the profit for the Newton division from making the J-5 is only $50,000 (see item 2 above).This results in a net decrease in Newton's operating income of $22,000.Since Garrett is evaluated based on operating income,he chose not to make the J-5 to avoid the negative effect on the Newton division's reported operating income and his paycheck.(4)Yes.The J-5 would make an additional contribution of $50,000.(5)Advantage: The choice to not allocate corporate overhead would eliminate dysfunctional behavior like Garrett's.Disadvantage: The divisional managers would no longer be conscious of the corporate overhead.Although that account is largely out of their control,they should be aware of it since Leakproof Faucets as a whole is not profitable unless the divisional contributions in total exceed the overhead at the corporate level.

Cost Allocation and Compensation Performance of Divisional Managers at Leakproof