Question

Westphalia Corporation produces audio equipment for home, office, and vehicles. The production manager (PM) and marketing manager (MM) are both are paid a flat salary and are eligible for a bonus. The bonus is equal to 2 percent of company profit that is in excess of a specified target profit. (All profit numbers exclude any bonus.) The maximum bonus is 10 percent of base salary. The PM's base salary is $200,000, and the MM’s is $280,000.

The target profit for this year is $9 million. The production manager has been approached by an engineering consulting firm that is willing to license to Westphalia a new manufacturing technique that would increase annual profit by 15 percent, after deducting the licensing fee. The PM 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:
Suppose that profit without using the technique this year will be $9 million. By how much will the PM’s bonus change if the new technique is adopted? By how much will the MM’s bonus change if the PM decides to adopt the new technique?
Suppose that profit without using the technique this year will be $10 million. By how much will the PM’s bonus change if the new technique is adopted? By how much will the MM’s bonus change if the PM decides to adopt the new technique?
Suppose that profit without using the technique this year will be $8 million. By how much will the PM’s bonus change if the new technique is adopted? By how much will the MM’s bonus change if the PM decides to adopt the new technique?

Answer 1

The change in bonus depends on the company profit achieved with the new technique. The PM’s bonus change could be up to $20,000, while the MM’s could be up to $27,000 or $28,000, depending on whether the profit excess leads to a bonus that exceeds their respective maximum caps. Without excess profit, there would be no change in bonuses.

Step-by-step explanation:

The student's question is about calculating the change in bonus for the production manager (PM) and marketing manager (MM) of Westphalia Corporation if a new manufacturing technique is employed. The bonus is linked to the company's profit, with a 2 percent bonus of the excess profit over the target profit, and a cap at 10 percent of their base salary. We need to calculate the bonus change under three scenarios where the profit is at $9 million, $10 million, and $8 million without the new technique.

If profit without the new technique this year will be $9 million, which is equal to the target profit, the technique that increases profits by 15 percent would result in a profit of $9 million + 15% of $9 million = $10.35 million. The excess profit would be $1.35 million, and both managers would receive 2% of this excess, up to a maximum of 10% of their respective salaries.

For the PM, with a base salary of $200,000, the bonus increase would be 2% of $1.35 million = $27,000. The maximum bonus PM could get is 10% of $200,000 = $20,000. Since the calculated bonus exceeds the maximum, the PM's bonus change would be $20,000. For the MM, with a base salary of $280,000, the bonus would be 2% of the excess profit which gives $27,000. The maximum bonus MM could get is 10% of $280,000 = $28,000. Since the calculated bonus does not exceed the maximum, the MM's bonus change would be $27,000.

If the profit without the new technique will be $10 million, the technique that increases profits by 15 percent would result in a profit of $11.5 million. The excess profit over target would be $2.5 million, and at 2% bonus rate, that gives $50,000 for both PM and MM. However, since the PM's maximum bonus is capped at $20,000, their bonus change would be $20,000. The MM's bonus change would be $28,000 since their bonus does not exceed their cap.

Finally, if the profit without the new technique will be $8 million, there is no excess profit and thus no bonus changes for both PM and MM.

Answer 2

In a business scenario, the change in bonuses for Westphalia Corporation's PM and MM is determined by calculating the additional profit from a new manufacturing technique and applying 2 percent of the excess profit to their bonuses, respecting the cap of 10 percent of their base salaries.

Step-by-step explanation:

The question relates to a scenario where Westphalia Corporation's production manager (PM) and marketing manager (MM) are considering adopting a new manufacturing technique that would increase company profits and, consequently, their bonuses. The bonuses for both PM and MM depend on the profit exceeding a target of $9 million, with a maximum bonus capped at 10 percent of their base salary. The PM's base salary is $200,000, and the MM's is $280,000. To determine the change in the bonuses, we need to calculate the additional profit generated by the new technique, then apply 2 percent of that excess to each manager's bonus.