Executive compensation, balanced scorecard. Acme Company recently introduced a new bonus plan for its corporate executives. The company believes that current profitability and customer satisfaction levels are equally important to the company’s long-term success. As a result, the new plan awards a bonus equal to 0.5% of salary for each 1% increase in business unit net income or 1% increase in the business unit’s customer satisfaction index. For example, increasing net income from $1 million to $1.1 million (or 10% from its initial value) leads to a bonus of 5% of salary, while increasing the business unit’s customer satisfaction index from 50 to 60 (or 20% from its initial value) leads to a bonus of 10% of salary. There is no bonus penalty when net income or customer satisfaction declines. In 2016 and 2017, Acme’s three business units reported the following performance results:
- 1. Compute the bonus as a percent of salary earned by each business unit executive in 2017.
Required
- 2. What factors might explain the differences between improvement rates for net income and those for customer satisfaction in the three units? Are increases in customer satisfaction likely to result in increased net income right away?
- 3. Acme’s board of directors is concerned that the 2017 bonus awards may not accurately reflect the executives’ overall performance. In particular, the board is concerned that executives can earn large bonuses by doing well on one performance dimension but underperforming on the other. What changes can it make to the bonus plan to prevent this from happening in the future? Explain briefly.
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Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
- A new CEO takes control of Do-Da Industries to turn it around (to make it profitable). Based on market research she wants to focus on two specific product lines. By the end of the first year the company exceeded budgeted profits by 18%. The company’s controller knows his annual bonus depends on exceeding budgeted profit and that next year’s performance would unlikely be similar to this year’s. Profit must exceed budget by 10% before the controller’s bonus kicks in. The controller realizes he can accrue some of next year’s expenses and defer some of this year’s revenue while still exceeding this year’s budgeted profit by 10%. Required: Why would the controller want to defer revenues but accrue expenses? Is this ethical? Why?arrow_forwardA service company has the following financial information (in millions of $)a. What is the profit leverage effect of reducing the cost of the facilitating goods in this company?b. It has been suggested that the in-house services costs could be reduced by 10 percent in the coming year by implementing lean systems. What effect would thisohave on earnings increase in percentage?c. What is the profit leverage effect of in-house services relative to profits?arrow_forwardQuyox Sdn Bhd manufactures a special toy called Omma that are sold through a network of sales agents throughout Malaysia. The company sold 67,500 units of Omma in 2022 with equivalent to sales amounting to RM1,350,000. The sales agents are currently paid at 15% commission on sales. The following is the pro forma (projected) statement of profit or loss and other comprehensive income for the year ended 31 December 2022. Qu Yox Sdn Bhd Pro Forma Statement of Profit or Loss and Other Comprehensive Income For the Year Ended 31 December 2022 Sales Cost of Goods Sold: Variable Fixed Gross Profit Operating expenses: Sales Commision Fixed Advertising Expenses General and Administrative Expenses: Rental expenses Administrative Salaries Expenses Insurance Expenses Net Income 675,000 135,000 202,500 33,750 27,000 67,500 20,250 1,350,000 810,000 540,000 351,000 189,000arrow_forward
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- Essentials Of Business AnalyticsStatisticsISBN:9781285187273Author:Camm, Jeff.Publisher:Cengage Learning,