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In: Accounting

Magnolia Manufacturing makes wing components for large aircraft. Kevin Choi is the production manager, responsible for...

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 $290,000 and Michelle’s is $350,000.

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? (Enter your answers in dollars, not in millions.)

Bonus Change
Kevin's ??
Michelle's ??

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? (Round your intermediate percentage answers to nearest whole percent. Enter your answers in dollars, not in millions.)

Bonus Change
Kevin's ??
Michelle's ??

Solutions

Expert Solution

Base Salary of Kevin=$290,000

Base salary of Michelle=$350,000

Target Profit=$6 million

By using the new technique, profit increased by 20%.

Bonus=2% of base salary

a.Profit without using this technique expected to be $6 million

Bonus without using the technique=Nil

Bonus Change

Kevin's

$                   5,800

(0.02*290000)

Michelle's

$                   7,000

(0.02*350000)

b. Profit without using this technique expected to be $8.5million

Increase in profit from target=(8.5/6)-1=0.41667=41.67%

Bonus without using the technique=4%

Kevin’s Bonus=0.04*290000=$11600

Michelle’s Bonus=0.04*350000=$14,000

Annual Profit by using the technique=1.2*8.5=$10.2 million

Increase in profit from target=(10.2/6)-1=0.7=70%

Bonus by using the technique:

Kevin’s Bonus=0.07*290000= $ 20,300

Michelle’s Bonus=0.07*350000= $ 24,500

Bonus Change

Kevin's

$     8,700

(20300-11600)

Michelle's

$     10,500

(24500-14000)

ekkarill92 answered 1 year ago
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