Renslen Inc., a truck manufacturing conglomerate, has recently purchased two divisions, Meyers Service Company and Wellington Products Inc. Meyers Service provides maintenance service on large truck cabs for 18-wheel trucks, and Wellington Products manufactures air brakes for 18-wheel trucks.
The employees at Meyers Service take pride in their work, because Meyers Service proclaims to offer the best maintenance service in the trucking industry. The managers of Meyers Service have received additional compensation from a 10% bonus pool based on income before income tax and bonus. Renslen plans to continue to compensate Meyers Service management on this basis because it is the same incentive compensation plant used for all other Renslen divisions.
Wellington Products offers a high-quality product to the trucking industry and is the premium choice even when compared to foreign competition. The management team at Wellington Products strives for zero defects and minimal scrap costs. Current scrap levels are at 2%. The incentive compensation plan for Wellington Products management has been a 1% bonus based on gross profit margin. Renslen plans to continue to compensate Wellington Products management on this basis.
Condensed income statements for divisions for the fiscal year ended May 31, 20B, follow:

Renslen has invited the management team from each of its divisions to an off-site management workshop in July, at which the bonus checks will be presented. Renslen top management is concerned that the different bonus plans at the two divisions may cause some heated discussion.
Required:
(1) Determine the 20B bonus pool available for the management team at each division.
(2) For each division, identify at least two advantages and at least two disadvantages to Renslen Inc. of the bonus pool incentive compensation plan.
(3) Having two different types of incentive compensation plans for two operating divisions in the same corporation can create problems.
(a) Discuss the behavioral problems that can arise from the use of different incentive compensation plans at the two divisions.
(b) Present arguments that Renslen Inc. can give to the management of each division that justify having two different incentive compensation plans.

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Renslen Inc. Divisional Income Statements For the Year Ending May 31, 20B Meyers Wellington Service Products Revenues Less costs and expenses: $4.000.000 $10,000,000 ..75,000 $4.950,000 2,200,000 2,150,000 1,000,000 2,500,000 65,000 278,000134,000 Total costs and expenses..$3,583,000 9,799,000 Income before income tax and bonuses.......n...417,000 201,000 Cost of goods sold Wages and salaries 30,000 Interest expense.. Other operating expenses...c... Each division has $1,000,000 of management salary expense that is eligible for the bonus pool.