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 $270,000 and Michelle’s is $330,000.

The target profit for this year is $9 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 $9 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 $11.5 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

(a) Without technique :

Profit is $9,000,000 which is also the target profit. Since there has been no increase in profit from target profit Kevin and Mischelle are not entitled to bonus

With technique:

Increase in profit = 9000000 x 20% = $1,800,000

10% of profit = 9000000 x 10% =$900,000

For every $900,000 increase in profit bonus = 1%

Therefore for $1,800,000 increase in profit bonus = 1800000/900000 = 2%

Kevin's bonus = 2% of base salary = 2% x 270000 = $5400

Michelle bonus =  2% of base salary= 2% x 330000= $6600

	With technique bonus ($)	Without technique bonus ($)	Change in bonus ($)
Kevin	5400	0	5400
Michelle	6600	0	6600

(b) Without technique:

Profit without using the new technique = $11500000

Percentage increase in profit beyond the target= [(11500000-9000000)/9000000]*100 = 27.77% = 30% approx

As for every 10% increase bonus is 1%. Therefore for 30% increase bonus is 3%

Kevin's bonus =$270,000 x 3% = $8,100

Michelle's bonus=$330,000 x 3% = $9,900

With technique:

Profit after implementation of the new technique = $11500000 + ($11500000 x 0.2) = $13800000

Percentage increase in profit beyond the target = [(13800000-9000000)/9000000]*100 = 53.33%

However, the maximum bonus payout can be 5% of base salary. So, in this case Kevin and Michelle will get 5% bonus.

Kevin's bonus =$270,000 x 5% = $13,500

Michelle's bonus=$330,000 x 5% = $16,500

	With technique bonus($)	Without technique bonus($)	Change in bonus ($)
Kevin	13500	8100	5400
Mischelle	16500	9900	6600