Magnolia Manufacturing makes wing components for large aircraft. Kevin Choi is t

Question

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 $370,000 and Michelle’s is $430,000. The target profit for this year is $9 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 profit. Required: (a) Suppose that profit without using the technique this year will be $9 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?

Explanation / Answer

Target Profit 9000000 on employing the new techniques profit increased by 20% 1800000 New level of Profit 10800000 Kevin's base salary Michelle’s Base salary 370000 430000 bonus 1% for 10% increase in profit. Total profit is increased by 20% 7400 8600 total compensation 377400 438600 bonus will change 7400 8600 Bonus will change by 7400 for Kelvin and 8600 for Michelle's from previous level of bonus

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