Question

Item1 1 points Item Skipped eBookPrintReferences Check my work Check My Work button is now enabledItem 1Item 1 1 points Item Skipped 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 $330,000 and Michelle’s is $390,000. 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?

Answer 1

Situation (a)
Target profit	5,000,000
Particulars	Without new method	With new method
Incremental profit	-	6,000,000
Incremental profit with adoption of new method		1,000,000
% increment over target profit		20%
	Kevin	Michelle
Base salary	330,000	390,000
No Bonus earned in old method as the target profit is 5 million and there is no information on any increment over the target	-	-
Bonus is 1% of base salary for every 10% profit that exceeds target	2%	2%
Bonus earned with new technique	6,600	7,800
By adopting new technique Kevin and Michelle are entitled to a bonus of 2% of base salary
The target profit for the year was 5 million and in old method there was no increment from the target
Hence by using the old method they would have earned no bonus, but with new technique they
are entitled to a bonus of 2% of base salary
Situation (b)
Target profit	5,000,000
Particulars	Without new method	With new method
Target profit	7,500,000	6,000,000
Incremental profit as compared to the target	2,500,000	1,000,000
% increment over target profit	50%	20%
	Kevin	Michelle
Base salary	330,000	390,000
Old method	5%	5%
New method	2%	2%
Bonus earned
Old method	16,500	19,500
New method	6,600	7,800
The bonus earnings would go down with the adoption of new method when with the old method the profit
earned is 50% over targeted profit whereas with adoption of new method the increment in profit over that
of the targeted profit is just 20%