Westphalia Corporation produces audio equipment for home, office, and vehicles. The production manager (PM) and marketing manager (MM) are both are paid a flat salary and are eligible for a bonus. The bonus is equal to 2 percent of company profit that is in excess of a specified target profit. (All profit numbers exclude any bonus.) The maximum bonus is 10 percent of base salary. The PM’s base salary is $200,000, and the MM’s is $250,000. The target profit for this year is $8 million. The production manager has been approached by an engineering consulting firm that is willing to license to Westphalia a new manufacturing technique that would increase annual profit by 15 percent, after deducting the licensing fee. The PM is unsure whether to employ the new technique this year, wait, or not employ it at all. Using the new technique will not affect the target.

Required

a. Suppose that profit without using the technique this year will be $8 million. By how much will the PM’s bonus change if the new technique is adopted? By how much will the MM’s bonus change if the PM decides to adopt the new technique?

b. Suppose that profit without using the technique this year will be $9 million. By how much will the PM’s bonus change if the new technique is adopted? By how much will the MM’s bonus change if the PM decides to adopt the new technique?

c. Suppose that profit without using the technique this year will be $7 million. By how much will the PM’s bonus change if the new technique is adopted? By how much will the MM’s bonus change if the PM decides to adopt the new technique?

d. Is it ethical for the production manager to consider the impact of the new technique on their bonus when deciding whether or not to use it? Explain.

e. Assess the management control system used at Westphalia Corporation and provide recommendations for changes, if any are required. Be sure to discuss

∙ Decision authority.

∙ Performance measures.

∙ Compensation.