Question

Magnolia Manufacturing makes wing components for large aircraft. Kevin Choi is the production manager, responsible for manufacturing, and Michelle Michaels is the marketing manager. Both managers are paid a flat salary and are eligible for a bonus. The bonus is equal to 1 percent of their base salary for every 10 percent profit that exceeds a target. The maximum bonus is 5 percent of salary. Kevin’s base salary is $360,000 and Michelle’s is $420,000.

The target profit for this year is $8 million. Kevin has read about a new manufacturing technique that would increase annual profit by 20 percent. He is unsure whether to employ the new technique this year, wait, or not employ it at all. Using the new technique will not affect the target.

Required:

a. Suppose that profit without using the technique this year will be $8 million. By how much will Kevin’s and Michelle’s bonus change if Kevin decides to employ the new technique?

	Bonus Change Kevin's Michelle's

b. Suppose that profit without using the technique this year will be $10.5 million. By how much will Kevin’s and Michelle’s bonus change if Kevin decides to employ the new technique?

	Bonus Change Kevin's Michelle's

Answer 1

1. if current profit is 8 millions-

current profit	target profit	excess	% excess	% bonus	bonus kevin	bonus michelle
8 million	8 million	0	0	0	0	0

after new technique

estimated profit	target profit	excess	% excess	% bonus	bonus kevin	bonus michelle
9.6 million	8 million	1.6 million	20%	2%	360000*2% =7200	420000*2% = 8400

change in bonus-

Kevin = 7200-0 = 7200; Michelle = 8400-0 = 8400

2.

if current profit is 10.5 millions-

current profit	target profit	excess	% excess	% bonus	bonus kevin	bonus michelle
10.5 million	8 million	2.5	31.25%	3%	360000*3% = 10800	420000*3% = 12600

after new technique

estimated profit	target profit	excess	% excess	% bonus	bonus kevin	bonus michelle
12.6 million	8 million	4.6 million	57.5%	5%	360000*5% =18000	420000*5% = 21000

change in bonus-

Kevin = 18000-10800 = 7200; Michelle = 21000-12600 = 8400