Compensation linked with profitability, on-time delivery, and external quality performance measures; balanced scorecard. Pacific-Dunlop supplies tires to major automotive companies. It has two tire plants in North America, in Detroit and Los Angeles. The quarterly bonus plan for each plant manager has three components:

a. Profitability performance. Add 2% of operating income.

b. On-time delivery performance. Add $12,000 if on-time delivery performance to the ten most important customers is 98% or better. If on-time performance is below 98%, add nothing.

c. Product quality performance. Deduct 50% of cost of sales returns from the ten most important customers.

Quarterly data for 2007 on the Detroit and Los Angeles plants are as follows:

January-March Detroit Operating income On-time delivery*

Cost ofsales returns*

Los Angeles Operating income On-time delivery*

Cost ofsales returns*

$ 960,000 98.4%

$ 21,600

$1,920,000 95.6%

$ 42,000

*For the ten most important customers.

April-June

$1,020,000 98.6%

$ 31,200

$1,800,000 97.1%

$ 40,800 July-September October-December

$ 840,000 97.1%

$ 12,000

$1,080,000 97.9%

$ 30,000

$2,160,000 97.9%

$ 33,600

$2,280,000 98.4%

$ 26,400 Required 1. Compute the bonuses paid in each quarter of 2007 to the plant managers ofthe Detroit and Los Angeles plants.

2. Discuss the three components of the bonus plan as measures of profitability, on-time delivery, and product quality.

3. Why would you want to evaluate plant managers on the basis of both operating income and on-time delivery?

4. Give one example of what might happen if on-time delivery were dropped as a perform¬

ance evaluation measure.