S_Session 15 - Responsibility Accounting - Post Class.pdf

# Exercise 3 a for 2018 the manager expects division 96

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Exercise 3 a For 2018, the manager expects Division 96 to earn an AI of 5,200,000, to achieve an ROI of 10% and to limit the level of faulty products at 2.8%. Calculate the manager’s expected total compensation for 2018.

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Exercise 3 a - Solution Base Salary: 100,000 AI: 40% x {[0.1 + (5.2 - 5.0)/(6.0 - 5.0) × (0.15 - 0.10) ] × 100,000 = .11 × 100,000} = 4,400 ROI: 30% x 10,000 = 3,000 Faulty products: 30% x {5,000 + 0.2 × 5,000} = 1,800 109,200
Exercise 3 b Before the products of Division 96 are packaged, an automated process quickly checks the quality of the products (using “goal -line technology ”). At the beginning of 2018, the manager is trying to decide whether to sell the machine at it’s current book -value of \$2,000,000. If the machine is sold, it will not be replaced. As a result, the quantity of faulty products is expected to increase to 3.5%, but operating costs are not expected to change. Should the manager sell the machine?

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Exercise 3 b - Solution Asset-base with the machine: ROI = AI/Asset-base Asset-base = AI/ROI = \$5,200,000/0.1 = \$52,000,000 Asset-base after the machine is sold = \$52,000,000 - 2,000,000 = \$50,000,000 New ROI = 5,200,000/50,000,000 = 10.4% New Bonus: AI: 40% x {[0.1 + (5.2 - 5.0)/(6.0 - 5.0) × (0.15 - 0.10) ] × 100,000 = .11 × 100,000} = 4,400 ROI: 30% x {10,000 + (0.104 -0.1)/(0.11-0.1) × 5,000} = 3,600 Faulty products: 30% x {2,000 + 0.5 × 3,000} = 1,050 9,050 SINCE 9,050 > 9,050 , SHOULD NOT SELL THE MACHINE
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