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3. The president of Modular Office of Brazil (MOB), the wholly owned Brazilian subsidiary of U.S.-based Modular Office Corporation receives a compensation package that consists
3. The president of Modular Office of Brazil (MOB), the wholly owned Brazilian subsidiary of U.S.-based Modular Office Corporation receives a compensation package that consists of a combination of salary and bonus. The annual bonus is calculated as a predetermined percentage of the pre-tax income earned by MOB. Brazil's national currency is the Brazilian real (BRL), which has been falling in value against the U.S. dollar. A condensed income statement for MOB for the most recent year is as follows (amounts in thousands of BRL): Page 16 Sales BRL 10,000 Expenses 9,500 Pre-tax income BRL 500 MOB's production is highly automated and depreciation on machinery is the company's major expense. After translating the BRL income statement into U.S. dollars (USD), the condensed income statement for MOB appears as follows (amounts in thousands of USD): Sales USD 2,500 Expenses 2,850 Pre-tax income (loss) USD (350) Required: a. Speculate as to how MOB's BRL pre-tax income became a USD pre-tax loss. b. Discuss whether the president of MOB should be paid a bonus or not
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