Thor-Equip AS specialises in the manufacture of medical equipment, a field that has become increasingly competitive. Approximately
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a (i) Reduced by excess of rework costs over 2% of operating profit.
(ii) No adjustment if rework costs are less than or equal to 2% of operating profit.
b Increased by ¬5000 if over 98% of deliveries are on time, by ¬2000 if 96-98% of deliveries are on time and by ¬0 if on-time deliveries are below 96%.
c (i) Increased by ¬3000 if sales returns are less than or equal to 1.5% of sales.
(ii) Decreased by 50% of excess of sales returns over 1.5% of sales.
If the calculation of the bonus results in a negative amount for a particular period, the manager simply receives no bonus and the negative amount is not carried forward to the next period.
Results for Thor-Equip's Kari and Siri Divisions for the year 2015, the first year under the new bonus plan, follow. In the previous year, 2014, under the old bonus plan, the Kari Division manager earned a bonus of ¬27 060 and the Siri Division manager a bonus of ¬22 440.
Required
1 Why did Knut need to introduce these new performance measures? That is, why does he need to use these performance measures over and above the operating profit numbers for the period?
2 Calculate the bonus earned by each manager for each six-month period and for the year 2015.
3 What effect did the change in the bonus plan have on each manager's behaviour? Did the new bonus plan achieve what he desired? What changes, if any, would you make to the new bonus plan?
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Related Book For
Management and Cost Accounting
ISBN: 978-1292063461
6th edition
Authors: Alnoor Bhimani, Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan
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