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 6 percent of salary. Kevin's base salary is $380,000 and Michelle's is $440,000. The target profit for this year is $5 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 $5 million. By how much will Kevin's and Michelle's bonus change if Kevin decides to employ the new technique? b. Suppose that profit without using the technique this year will be $7.5 million. By how much will Kevin's and Michelle's bonus change if Kevin decides to employ the new technique? Complete this question by entering your answers in the tabs below. Required A Required B Suppose that profit without using the technique this year will be $7.5 million. By how much will Kevin's and Michelle's bonus change if Kevin decides to employ the new technique? (Round your intermediate percentage answers to nearest whole percent. Enter your answers in dollars, not in millions.) Bonus Change Kevin's Michelle's < Required A Required B >

Answer 1

Requirement 1 Kevin's Salary Michelle's Salary Target Profit Bonus Rate Maximum Bonus Increase in Profit 3,80,000 4,40,000 50,00,000 1% 6% 20% 10% of Profit = New Profit Increase (20%) = Percentage of Bonus $5,000,000 X 10% = $5,000,000 X 20% = $1,000,000/5,000,000 = 5,00,000 10,00.000 2 % Kevin's ($380,000 X 2%) Michelle's ($440,000 X 2%) Bonus Change 7,600 8,800 Requirement 2 10% of Profit $7,500,000 X 10% = Profit Increase (new technique) = $7,500,000 - $5,000,000 = % Bonus (new technique) (7,500,000/2,500,000) = Profit Increase (new technique) $7,500,000 X.20% = Percentage Bonus (new technique) = $1,500,000 / 750,000 = 7,50,000 $2,500,000 3 % 15,00,000 2 % Profit = Target Profit = 75,00,000 50,00,000 Kevin's ($380,000 X 3%) Michelle's ($440,000 X 3%) Bonus Change 11,400 13,200