Stefan Meller manages the European operations for a large U.S. firm. All manufacturing is done in the

Stefan Möeller manages the European operations for a large U.S. firm. All manufacturing is done in the United States, and Stefan’s primary job responsibilities entail generating sales and coordinating delivery of the goods ordered. In line with the firm’s philosophy of “pay for performance,” Stefan receives a base salary of €15,000 per month (€ 5 euro, or Europe’s common currency) plus a commission, which has the following properties:

Annual Sales Commission Rate

€ 0 to € 10 million ........ 0%

€ 10 million to € 20 million ... 2%

Over € 20 ........... 5%

Thus, if Stefan generated €25 million in sales for a year, his commission would be: [(€20 million - €10 million) × .02] + [(€25 million - €20 million) × .05] = €450,000.

Stefan’s year-to-date sales are €16 million, and, based on market intelligence, he believes that he can increase sales by €6 million this year if he spends an additional €1 million on an intensive sales campaign. However, €4 million of the increased sales would represent customers pushing next year’s sales forward to this year. This would mean that Stefan would likely only generate €12 million in sales next year rather than his normal volume of €16 million. If Stefan does not undertake the intensive sales campaign, sales are expected to be €16 million this year and next year.

Required:

a. Should Stefan undertake the intensive sales campaign? Why?

b. Assume that Stefan’s parent company earns $0.40 in profit (pre-bonus) for each dollar of sales. From the parent company’s standpoint, should Stefan undertake the sales campaign? Why?

c. Is there a conflict of interest between Stefan and his parent company? If yes, how might the parent company resolve this conflict?