BB Lecture Illustration Compensation
Lecture Illustration: Compensation
Salt Water Ltd.
Salt Water Ltd is a large and successful manufacturer of engines. The company consists of two divisions: the Automotive Engine division and the Outboard Motor Division. Salt Water has recently acquired a new company which will become a third division. The new Couch division is a small manufacturer of lawnmower motors. It has been owned and managed by the one person for 40 years. The prior owner treated all employees as part of his family. The company was noted for the lack of a ‘them and us’ attitude between employees and management, and there was free and open communication between all staff. Unfortunately, Couch is not a strong performer; the lawnmower market is in decline and profits have slipped.
Salt Water is known for its modern management systems and would like all managers at Couch to participate in the performance-related pay system that is used in the other two divisions. The profit-sharing plan applies to senior divisional managers only. It is based on placing 10 percent of Salt Water’s profits before interest and income tax into a pool, which is then shared by the senior divisional managers in direct proportion to their base salaries. The senior managers in the two original divisions received bonuses of 11 percent and 12 percent of their salaries in 2012 and 2013 respectively.
The profit results for 2014, the first financial year following the acquisition of the Couch Division, are as follows:
Outboard
Automotive
Couch
Sales revenue
$8 000 000
$10 000 000
$2 000 000
Cost of goods sold 4 000 000 6 000 000 1 500 000
Gross margin
$4 000 000
$4 000 000 $500 000
Administrative costs
1 200 000
900 000
300 000
Marketing and selling costs 1 600 000 900 000 100 000
Total costs
$2 800 000
$1 800 000 $400 000
Profit before interest and taxes
$1 200 000
$2 200 000 $100 000
Senior management salaries included in the above costs, and divisional assets at the end of 2014,
Salt Water Ltd.
Salt Water Ltd is a large and successful manufacturer of engines. The company consists of two divisions: the Automotive Engine division and the Outboard Motor Division. Salt Water has recently acquired a new company which will become a third division. The new Couch division is a small manufacturer of lawnmower motors. It has been owned and managed by the one person for 40 years. The prior owner treated all employees as part of his family. The company was noted for the lack of a ‘them and us’ attitude between employees and management, and there was free and open communication between all staff. Unfortunately, Couch is not a strong performer; the lawnmower market is in decline and profits have slipped.
Salt Water is known for its modern management systems and would like all managers at Couch to participate in the performance-related pay system that is used in the other two divisions. The profit-sharing plan applies to senior divisional managers only. It is based on placing 10 percent of Salt Water’s profits before interest and income tax into a pool, which is then shared by the senior divisional managers in direct proportion to their base salaries. The senior managers in the two original divisions received bonuses of 11 percent and 12 percent of their salaries in 2012 and 2013 respectively.
The profit results for 2014, the first financial year following the acquisition of the Couch Division, are as follows:
Outboard
Automotive
Couch
Sales revenue
$8 000 000
$10 000 000
$2 000 000
Cost of goods sold 4 000 000 6 000 000 1 500 000
Gross margin
$4 000 000
$4 000 000 $500 000
Administrative costs
1 200 000
900 000
300 000
Marketing and selling costs 1 600 000 900 000 100 000
Total costs
$2 800 000
$1 800 000 $400 000
Profit before interest and taxes
$1 200 000
$2 200 000 $100 000
Senior management salaries included in the above costs, and divisional assets at the end of 2014,