Question

Magnolia Manufacturing makes wing components for large aircraft. Kevin Choi is the pro-

duction 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 $180,000 and Michelle’s is

$240,000.

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 bonus change if he decides to employ the new technique? By how much will

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 bonus change if he decides to employ the new technique? By how much

will Michelle’s bonus change if Kevin decides to employ the new technique?

c. Suppose that profit without using the technique this year will be $4.8 million. By how

much will Kevin’s bonus change if he decides to employ the new technique? By how much

will Michelle’s bonus change if Kevin decides to employ the new technique?

d. Is it ethical for Kevin to consider the impact of the new technique on his bonus when

deciding whether or not to use it? Explain.

e. Assess the management control system used at Magnolia Manufacturing and provide

recommendations for changes, if any are required. Be sure to discuss:

• Decision authority

• Performance measures

• Compe nsation

Answer 1

ANS 1

Suppose if the profit without using the technique this year will be $6 million then profit using new technique will be 20% more than target profit i.e. $6 million given that for every 10% increase in the profit there is 1% bonus on the basic salary payable to each of Kevin and michelle.

hence Bonus for kevin is 2% of basic salary i.e. 2% of $180,000 = $3,600

Bonus for Michelle is 2% of basic salary i.e. 2% of $240,000 = $4,800

ANS 2

Suppose if the profit without using the technique this year will be $8.2 million then profit using new technique will be 9.84 more than target profit i.e. $6 Million by $3.84 million which is 64% more than the target,

Bonus payable to kevin and Michelle @1% for every 10% increase in profit over target profit to a max of 5%, as the profit is more than target profit by 64% the max bonus payable is 5% to each of kevin and michelle

hence Bonus for kevin is 5% of basic salary i.e. 5% of $180,000 = $9,000

Bonus for Michelle is 5% of basic salary i.e. 5% of $240,000 = $12,000

ANS 3

Suppose if the profit without using the technique this year will be $4.8 million then profit using new technique will be 5.76, which is less than target profit i.e. $6 Million by $ .24 million hence no bonus is payable to them.

ANS 4

It is not ethical for kevin to consider the impact of the new technique on his bonus when deciding whether or not to use it as there is increase in the profit because of implementation of new technique to the company as a whole.