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 $200,000 and Michelle’s is $260,000.

The target profit for this year is $6 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 $6 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 $8.5 million. By how much will Kevin’s and Michelle’s bonus change if Kevin decides to employ the new technique?

Suppose that profit without using the technique this year will be $6 million. By how much will Kevin’s and Michelle’s bonus change if Kevin decides to employ the new technique? (Enter your answers in dollars, not in millions.)

	Bonus Change Kevin's Michelle's

Answer 1

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Magnolia Manufacturing

Answer a

If target profit is $ 6 million and actual profit is also $ 6 millions then there will be no bonus. So change in bonus will be the bonus amount paid if due to increase in profit after implementing new technology.

Implementing new technology will increase profit by 20%.

The bonus is equal to 1 percent of the base salary for every 10 percent profit that exceeds a target.

So if increase in profit is 20% then bonus is 2%

	Kevin	Michelle
Base Salary	200,000.00	260,000.00
Bonus %	2%	2%
Bonus Change	$   4,000.00	$   5,200.00
Answer b	$ millions
Actual profit	8.50
Target profit	6.00
Increase in profit	2.50
Increase in profit %	41.67%
Bonus %	4%

So current bonus is already 4%. The maximum bonus is 5 percent of salary so even if increase in profit is 20% then bonus will be only 1% because if 2% bonus is given then total will become (4%+2%=6%) which is not allowable.

	Kevin	Michelle
Base Salary	200,000.00	260,000.00
Bonus %	1%	1%
Bonus Change	$   2,000.00	$   2,600.00