This is an Accounting question from the book Title: Cost Management: A Strategic

Question

This is an Accounting question from the book

Title:          Cost Management: A Strategic Emphasis

Author:      Blocher, Stout & Cokins

Publisher: McGraw-Hill/Irwin

ISBN: 978-0-07-352694-2The question is # 20-38 on page 920-921Ramon Martinez is the general manager of Classic Inn, a local mid-priced hotel with 100 rooms. His job objectives include providing resourceful and friendly service to the hotel%u2019s guests, maintaining an 80 percent occupancy rate, improving the average rate received per room to $58 from the current $55, and achieving a savings of 5 percent on all hotel costs. The hotel%u2019s owner, a partnership of seven people who own several hotels in the region, want to structure Ramon%u2019s future compensation to objectively reward him for achieving these goals. In the past, he has been paid an annual salary of $42,000 with no incentive pay. The incentive plan the partners developed has each of the goals weighted as follows:

Measure                                                      Percent of total Responsibility

Occupancy Rate                                                            40%

opeating within 95% of expense budget                        25%

Average Room Rate                                                       35%

If Ramon achieves all of these goals, the partners determined that his performance shouldmerit a bonus of $23,000. The partners also agreed that his salary would be reduced to $60,000because of the addition of the bonus.

The Goal measures used to compensate Ramon are as follows:

Occupancy Goal:    29,200 room-nights=80% occupancy rate*100 rooms*365 days

Compensation:   40% weight*$23,000 target rewards= $9,000.   $9,2000/29200= $0.315 per room night

Expense goal:       5% savings,

Compensation:     25% weight*$23,000 target reward= $5,750, $5,750/5= $1,150 for each percentage point saved

Room Rate Goal:     $3 rate increase

Compensation:         35% weight *$23,000 Target reward=$8,050, $8050/300= $26.83 per each cent increase

Ramon%u2019s new compensation plan will thus pay him a $30,000 salary plus 30 cents per room-night sold plus $1,150 for each percentage point saved in the expense budget plus $26.83 per each cent increase in average room rate.

Required

1. Based on this plan, what will Ramons total compensation be if his performance results are

a. 30,000 room-nights, 5 percent saved, $3.00 rate increase?

b. 25,000 room-nights, 3 percent saved, $1.15 rate increase?

c. 28,000 room-nights, 0 saved, $1.00 rate increase?

2.Comment on the expected effectiveness of this plan

Explanation / Answer

1.a. Compensation = 30,000+0.3*30,000+1150*5+26.83*100 = $47,433

1.b. Compensation = 30,000+0.3*25,000+1150*3+26.83*115 = $44,035

1.c. Compensation = 30,000+0.3*28,000+1150*0+26.83*100 = $41,083

2. The plan is expected to incentivize Ramon towards working towards the specific parameters as his compensation is directly increasing based on his improving the performance metrics and will ensure the owners' targets are adequately met.

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