Wonkies, Inc. is a large company that owns fast-food restaurants, has a soft drink division, and a snack division. Wonkies, Inc. corporate management gives its division managers considerable operating and investment autonomy in running their divisions. Wonkies, Inc. is considering how it should compensate Mark Hamm, the general manager of the snack division. ■ Proposal 1 calls for paying Hamm a fixed salary. ■ Proposal 2 calls for paying Hamm no salary and compensating him only on the basis of the division’s RI, calculated based on operating income before any bonus payments. ■ Proposal 3 calls for paying Hamm some salary and some bonus based on RI. Q. Evaluate the three proposals, specifying the advantages and disadvantages of each.

Wonkies, Inc. is a large company that owns fast-food restaurants, has a soft drink division, and a snack division. Wonkies, Inc. corporate management gives its division managers considerable operating and investment autonomy in running their divisions. Wonkies, Inc. is considering how it should compensate Mark Hamm, the general manager of the snack division. ■ Proposal 1 calls for paying Hamm a fixed salary. ■ Proposal 2 calls for paying Hamm no salary and compensating him only on the basis of the division’s RI, calculated based on operating income before any bonus payments. ■ Proposal 3 calls for paying Hamm some salary and some bonus based on RI. Q. Evaluate the three proposals, specifying the advantages and disadvantages of each.

CONCEPTS IN FED.TAX.,2020-W/ACCESS

20th Edition

ISBN:9780357110362

Author:Murphy

Publisher:Murphy

Chapter6: Business Expenses

Section: Chapter Questions

Problem 58P

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Wonkies, Inc. is a large company that owns fast-food restaurants, has a soft drink division, and a snack division. Wonkies, Inc. corporate management gives its division managers considerable operating and investment autonomy in running their divisions. Wonkies, Inc. is considering how it should compensate Mark Hamm, the general manager of the snack division. ■ Proposal 1 calls for paying Hamm a fixed salary. ■ Proposal 2 calls for paying Hamm no salary and compensating him only on the basis of the division’s RI, calculated based on operating income before any bonus payments. ■ Proposal 3 calls for paying Hamm some salary and some bonus based on RI. Q. Wonkies, Inc. competes against Galaxy Industries in the snack business. Galaxy is approximately the same size as the Wonkies snack division and operates in a business environment that is similar to Wonkies. The top management of Wonkies, Inc. is considering evaluating Hamm on the basis of his snack division’s RI minus Galaxy’s RI. Hamm…
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Lamothe Solutions is a management consulting firm. Its Business Division advises firms on the adoption and use of financial systems. Civic Division consults with state and local governments. Civic Division has a client that is interested in implementing a new costing system in its public works department. The division's head approached the head of Business Division about using one of its associates. Corporate Division charges clients $780 per hour for associate services, the same rate other consulting companies charge. The Civic Division head complained that it could hire its own associate at an estimated variable cost of $380 per hour, which is what Business pays its associates. Suppose that Civic Division will charge the client interested in implementing a costing system by the hour based on cost plus a fixed fee, where the cost is primarily the consultant's hourly pay. Assume also that Civic Division cannot hire additional consultants. That is, if it is to do this job, it will need…
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Lamothe Solutions is a management consulting firm. Its Business Division advises firms on the adoption and use of financial systems. Civic Division consults with state and local governments. Civic Division has a client that is interested in implementing a new costing system in its public works department. The division's head approached the head of Business Division about using one of its associates. Corporate Division charges clients $780 per hour for associate services, the same rate other consulting companies charge. The Civic Division head complained that it could hire its own associate at an estimated variable cost of $380 per hour, which is what Business pays its associates. Suppose that Civic Division will charge the client interested in implementing a costing system by the hour based on cost plus a fixed fee, where the cost is primarily the consultant's hourly pay. Assume also that Civic Division cannot hire additional consultants. That is, if it is to do this job, it will need…
Lamothe Solutions is a management consulting firm. Its Business Division advises firms on the adoption and use of financial systems. Civic Division consults with state and local governments. Civic Division has a client that is interested in implementing a new costing system in its public works department. The division's head approached the head of Business Division about using one of its associates. Corporate Division charges clients $815 per hour for associate services, the same rate other consulting companies charge. The Civic Division head complained that it could hire its own associate at an estimated variable cost of $415 per hour, which is what Business pays its associates. Required: a. What is the maximum price that Civic Division should pay? b. What is the maximum transfer price that Business Division should obtain for its services, assuming that it is operating at capacity? c-1. Is there any change in maximum price as indicated in part (a), if Business Division had idle…
The controller of one division of a large diversified firm is compensated by salary plus bonus. The bonus is a significant part of total compensation, and is based directly on the profits of the division. Thus, the controller has an incentive to find ways to increase profits, including the delay of discretionary expenses such as research and development, delay of maintenance and repair of manufacturing equipment, and delay of sales promotions. Required: Is finding ways to increase profits as described above unethical? Why or why not? Who is to blame if anyone?
Which one of the following represents the best effort to reduce the agency problem? Select one: Increasing the salary of the company CEO every time the company opens a new store Giving senior managers bonuses consisting of shares of company whenever the company improves its production efficiency Providing company cars to all managers employed by the firm for more than one year Paying senior managers a cash bonus each year based on the number of people employed by the company
Durham Parts (DP) makes a variety of products. It is organized in two divisions, Eastern and Western. The managers for each division are paid, in part, based on the financial performance of their divisions. The Western Division normally sells to outside customers but. on occasion, also sells to the Eastern Division. When it does, corporate policy states that the price must be cost plus 25 percent to ensure a "fair" return to the selling division. Western received an order from Eastern for 1,200 units. Western's planned output for the year had been 4,800 units before Eastern's order. Western's capacity is 6,000 units per year. The costs for producing those 4,800 units follow Materials Direct labor Other costs varying with output Fixed costs (do not vary with output) Totals Total $ 240,000 115,200 76,800 288,000 $ 720,000 Per Unit $ 50 24 16 60 $ 150 Required: a. If you are the manager of the Western Division, what unit cost would you ask the Eastern Division to pay? b. If you are the…
Ethics in Action TAC Industries Inc. sells heavy equipment to large corporations and federal, state, and local governments. Corporate sales are the result of a competitive bidding process, where TAC competes against other companies based on selling price. Sales to the government, however, are determined on a cost plus basis, where the selling price is determined by adding a fixed markup percentage to the total job cost. Tandy Lane is the cost accountant for the Equipment Division of TAC Industries Inc. The division is under pressure from senior management to improve income from operations. As Tandy reviewed the division's job cost sheets, she realized that she could increase the division's income from operations by moving a portion of the direct labor hours that had been assigned to the job order cost sheets of corporate customers onto the job order costs sheets of government customers. She believed that this would create a “win–win” for the division by (1) reducing the cost of…