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Profitability
Rework
On-time delivery
Sales returns
(0.02
$256,500)
(0.02
$256,500) – $4,500
Over 98%
[(0.015
$2,137,500) – $33,560]
50%
$5,130
0
4,000
(749)
Semiannual bonus installment
Semiannual bonus awarded
$8,381
$8,381
July 1, 2014 to December 31, 2014
Profitability
Rework
On-time delivery
Sales returns
(0.02
$304,500)
(0.02
$304,500) – $6,000
No bonus—under 96%
[(0.015
$2,175,000) – $31,875] which is
greater than zero, yielding a bonus
$ 6,090
0
0
2,500
Semiannual bonus installment
Semiannual bonus awarded
$ 8,590
$ 8,590
Total bonus awarded for the year
$16,971
3. The manager of the Central Division is likely to be frustrated by the new plan, as the
division bonus has fallen by more than $15,000 compared to the bonus of the previous year.
However, the new performance measures have begun to have the desired effect––both on-time
deliveries and sales returns improved in the second half of the year, while rework costs were also
moderately lower. If the division continues to improve at the same rate, the bonus could
approximate or exceed what it was under the old plan.
The manager of the Western Division should be at least as satisfied with the new plan as
with the old plan, as the bonus is higher. Sales returns decreased slightly, to under the 1.5%
benchmark. However, on-time deliveries declined considerably in the second half of the year and
rework costs increased. Unless the manager institutes better controls, the bonus situation may not
be as favorable in the future. This could motivate the manager to improve in the future, but
currently at least, the manager has been able to maintain his bonus without showing improvement
in all of the areas targeted by Mendez.
Pedro Mendez’s revised bonus plan for the Central Division fostered the following
improvements in the second half of the year despite an increase in sales:
• An increase of 1.9 percentage points in on-time deliveries
• A $375 reduction in rework costs
• A $10,500 reduction in sales returns
However, operating income as a percent of sales has decreased (11% to 10%).
The Western Division’s bonus has remained approximately the same as a result of the
following effects:
• An increase of 2.0 percentage points in operating income as a percent of sales (12% to
14%).
• A decrease of 3.6 percentage points in on-time deliveries.
• A $1,500 increase in rework costs.
• A $1,685 decrease in sales returns.
This would suggest that revisions to the bonus plan are needed. Possible changes include the
following:
