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 2013 are shown below for the three divisions of Leakproof Faucet Corp:
*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 2013. 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 2013 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.

Question

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 2013 are shown below for the three divisions of Leakproof Faucet Corp:
  *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 2013. 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 2013 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.

Quizplus · Accepted Answer

The Answer of 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 2013 are shown below for the three divisions of Leakproof Faucet Corp:
  *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 2013. 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 2013 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.

Performance of Divisional Managers at Leakproof Faucet Corporation Is Judged