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Harley Davidson has been manager of Southwest Division for the past three years. In years 2 and 3, he was able to qualify for an annual bonus of $50,000 by meeting a target growth rate of 10% of gross sales. Income statements for the division (in $thousands): Year 1 Year 2 Year 3 Gross sales 30,200 33,300 36,700 Returns and allowances 150 285 370 Net sales 30,050 33,015 36,330 COGS 15,210 17,820 19,770 Gross profit 14,840 15,195 16,560 Expenses: Sales commissions 3,020 3,330 3,670 Manager salary/bonus 100 150 150 Advertising 460 780 975 Other division overhead 4,050 4,890 5,630 General and administrative 6,040 6,660 7,340 13,670 15,810 17,765 Net income/loss 1,170 (615) (1,205) All advertising is local to the division and controlled by the manager. 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 Ajax. 2) Because Southwest Division is showing increasing losses, a senior vice president has suggested that the division be closed. Comment.
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