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 $280,000 and Michelle’s is $340,000. 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? (Enter your answers in dollars, not in millions.)

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.)

Answer 1

Based on the information given in the question:

1. Base Salary of Kevin = $280,000

2. Base Salary of Michelle = $340,000

3. Maximum Bonus for Kevin = 6% of Base salary

4. Maximum Bonus for Michelle = 6% of Base salary

5. Target profit for the year = $5 million

6.Increase in the annual profit after implementation of new technique =20%

a) Profit without using the new technique = $50,00,000

Profit after implementation of the new technique = $50,00,000 + ($50,00,000*20%) = $60,00,000

Percentage increase in the profit beyond the target =(6-5)/5*100 = 20%

This implies that the amount of bonus is 20%

Hence Kevin's bonus will increase by $280,000*0.02 = $5,600

and Michelle's bonus will increase by $340,000*.02 = $6,800

b) Profit without using the new technique = $7.5 million

Profit after implementation of the new technique =$7.5 million + ($ 7.5 million *0.2) = $90,00,000

Percentage increase in the profit beyond the target =(9 - 5)/5*100 = 80%

However, the maximum bonus allowed is 6% of base salary. Hence both managers will get 6% Bonus

Kevin's bonus will increase by $280,000*0.06 = $16,800

and Michelle's bonus will increase by $340,000*.06 = $20,400