question archive West Communications is considering adopting a bonus plan for its executives
West Communications is considering adopting a bonus plan for its executives
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West Communications is considering adopting a bonus plan for its executives. Two plans are cur- rently being evaluated. The first plan involves executives receiving a bonus of 8 percent of com- pany earnings calculated on income after deduction for bonus but before deduction for income tax. The second plan involves a bonus of 12 percent calculated on income after deductions for both bonus and income tax. Income tax is 30 percent of income after bonus. If income before bonus and taxes for the year is estimated to be $100,000, which bonus plan would company executives prefer?
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Answer:
Plan A
B = 0.08 ($100,000 - B) B = $8,000 - 0.08 B
1.08 B = $8,000
B = $7,407
Plan B
B = 0.12 ($100,000 - B - T) T = 0.30 ($100,000 - B)
Substituting the second equation into the first and solving for B:
B = 0.12 [$100,000 - B - 0.30 ($100,000 - B)] B = 0.12 ($100,000 - B - $30,000 + 0.3 B)
B = $12,000 - 0.12 B - $3,600 + 0.036 B 1.084 B = $8,400
B = $7,749
Plan B results in the highest bonus for company executives assuming an income before bonus and taxes of $100,000.
