Question

Truth Inducers Corporation has implemented the following bonus scheme for its regional sales managers. The mangers are paid 5% of the sales forecast and a 2% incremental pay for every $ of actual sales in excess of forecast whenever actual sales exceed forecast. However, if actual sales fall below the forecast, the total payment is 5% of the sales forecast minus 7% of the amount by which sales fall below forecast. Under the above scheme, a sales manager, who has private knowledge of expected sales of $11,000, can expect to make a bonus of

		$480 when she makes a forecast of $11,000
		$520 when she makes a forecast of $10,000
		$430 when she makes a forecast of $11,000
		$500 when she makes a forecast of $10,000

Answer 1

If actual sales are greater than the forecast sales, then we will get 5% bonus of forecast sales and 2% for every sales greater than forecast sales.

Sales made = $ 11,000.

Let us take option 1 for checkout.

It is said that $ 480 when she makes a forecast of $11,000.

So 5 % of forecast = 11,000 x 5%

= $550.

Here there will be no Incremental sales as sales is equal to forecast sales.

So option is not correct because she will get 550 as bonus but option says only 480 as bonus.

Let us take second option.

It is said that $520 will get if she makes a forecast sale of $10,000.

5% of forecast sale = 10,000 x 5%

= $500.

Incremenatl 2% above forecast is calculated as,

Incremental sale = 11,000 - 10,000

Incremental sales = 1,000.

2% of 1,000 = $ 20.

So she will get a total of $ 520 as bonus(500+20) when she made a forecast of $ 10,000.

Hence, second option is the correct answer.

SUMMARY:

She will get $500 as bonus for forecast sale and $20 for extra sales made by her. So total of $ 520 will get as bonus when she forecast sales of $10,000.

Hence option B is the correct answer.