Magnolia Manufacturing makes wing components for large aircraft. Kevin Choi is t
ID: 2516731 • Letter: M
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 $290,000 and Michelle’s is $350,000.
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 and Michelle’s bonus change if Kevin decides to employ the new technique? (Enter your answers in dollars, not in millions.)
b. Suppose that profit without using the technique this year will be $8.5 million. By how much will Kevin’s and Michelle’s bonus change if Kevin decides to employ the new technique? (Round your intermediate percentage answers to nearest whole percent. Enter your answers in dollars, not in millions.)
Bonus Change Kevin's ?? Michelle's ??Explanation / Answer
Base Salary of Kevin=$290,000
Base salary of Michelle=$350,000
Target Profit=$6 million
By using the new technique, profit increased by 20%.
Bonus=2% of base salary
a.Profit without using this technique expected to be $6 million
Bonus without using the technique=Nil
Bonus Change
Kevin's
$ 5,800
(0.02*290000)
Michelle's
$ 7,000
(0.02*350000)
b. Profit without using this technique expected to be $8.5million
Increase in profit from target=(8.5/6)-1=0.41667=41.67%
Bonus without using the technique=4%
Kevin’s Bonus=0.04*290000=$11600
Michelle’s Bonus=0.04*350000=$14,000
Annual Profit by using the technique=1.2*8.5=$10.2 million
Increase in profit from target=(10.2/6)-1=0.7=70%
Bonus by using the technique:
Kevin’s Bonus=0.07*290000= $ 20,300
Michelle’s Bonus=0.07*350000= $ 24,500
Bonus Change
Kevin's
$ 8,700
(20300-11600)
Michelle's
$ 10,500
(24500-14000)
Bonus Change
Kevin's
$ 5,800
(0.02*290000)
Michelle's
$ 7,000
(0.02*350000)
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