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Ajax Company manufactures a variety of industrial products sold throughout the United States. 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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