Margaret Magee has served both as an outside director to Maxcor Manufacturing since 2007 and as a member of the company€™s compensation committee since 2011. Margaret has been reviewing Maxcor€™s 2014 preliminary earnings statement in preparation for the February 2015 board and compensation committee meetings. She is uneasy about the company€™s definition and computation of operating profits for 2014, particularly because management bonuses at Maxcor are based on achieving specific operating profit goals.

Research and Engineering Expenses. Research and engineering expenses include both amounts charged to Research and development expenses for new product development and charges originally made to Cost of goods sold for ongoing product improvements. The amounts (in millions) for 2014 and 2013 were:

Plant Closing Costs. In 2014, the Company recorded provisions for plant closing and staff consolidation costs totaling $2.62 million. Included in this total are charges related to the probable closing of the Company€™s York, Pennsylvania, facility ($1.75 million), the consolidation of the North American operations of the Building Construction Products Division ($0.63 million), and charges to reflect lower estimates of the market value of previously closed U.K. facilities ($0.24 million). These costs include the estimated costs of employee severance benefits, net losses on disposal of land, buildings, machinery and equipment, and other costs incidental to the closing and planned consolidation.
Maxcor Manufacturing is an established, privately held manufacturer that operates in two principal business segments: Building construction products, which involves the design, manufacturing, and marketing of construction and materials-handling machinery, and Engines for various off-highway applications. Before 2014, the company had experienced 15 years of steadily increasing sales and operating profits.
The company was founded in 1938 by Hugh Maxwell, a former Ford Motor Company engineer. Neither Maxwell nor any members of his family are currently company officers. Maxcor€™s common stock is held by the Maxwell Family Trust (35%), the Maxwell Employee Stock Ownership Plan (ESOP) Trust (50%), a venture capital firm (13%), and current management (2%). Magee also serves as an outside trustee for the Maxwell ESOP Trust.
Maxcor€™s senior management participates in an incentive bonus plan that was first adopted in 2004. The bonus formula for 2014 was approved by the compensation committee at its February 2014 meeting. According to the plan, each senior manager€™s 2014 bonus is to be determined as follows:

The compensation committee can award a lower amount than that indicated by the plan formula if circumstances warrant such action. No bonus reductions have occurred since the plan was adopted in 2004.

Required:
Why might Magee feel uneasy about Maxcor€™s computation of 2014 operating profits? Should she approve the 100% bonus payment for 2014 as specified by the plan formula? What changes (if any) would you recommend be made to the bonus formula for nextyear?

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Maxcor Manufacturing Consolidated Results of Operations Years Ended December 31 ($ in millions) 2014 2013 S111.2 (92.2) Sales S98.4 ng costs Cost of goods sold (81.5) (12.5) 4.4 (12.9) (2.4) (2.6) Selling, general, and administrative expenses Operating profit Research and development expenses (see Provision for plant closings (see note) Interest expense Other income note) (5.7) (2.6) (2.9) Profit (loss) before taxes Provision (credit) for income taxes Profit (loss) of consolidated companies Equity in profit of affiliated companies 2.3 (0.8) 1.5 0.3 (4.0) 0.2 Profit (loss) $(3.8) 2014 Research and development expenses Cost of goods sold Research and engineering expense $5.7 2.9 $8.6 2013 $2.4 6.3 S8.7 Bonus as Percentage of 2014 Salary 0% 100 200 300 2014 Operating Profits ($ in milliors) Below $4.0 At least $4.0 At least $6.0 At least $8.0