The Management Consulting Division (MCD) of Total Financia Services is evaluated by corporate management based on the profits it generates. Budgeted pretax income is the benchmark performance measure. For 2001, the budgeted income statement for MCD was as follows:
|
Sales |
$6,000,000 |
|
Variable costs |
4,200,000 |
|
Contribution margin |
$1,800,000 |
|
Fixed costs |
1,200,000 |
|
Pretax income |
$600,000 |
At the end of 2001, the actual results for MCD were determined. Those results follow:
|
Sales |
$6,500,000 |
|
Variable costs |
4,875,000 |
|
Contribution margin |
$1,625,000 |
|
Fixed costs |
1,205,000 |
|
Pretax income |
$420,000 |
a. Based on the preceding information, evaluate the performance of MCD. What was the principal reason for the poor profit performance?
b. Why do complete income statements provide a more complete basis for evaluating the profit performance of a manager than mere comparisons of the bottom lines of the budgeted and actual income statements?