Assignment questions:

1. Were Berkshire's motivations for a new incentive system reasonable? If so, what were their main options for a new system? Was an economic profit-focused system a reasonable choice?

2. Use the data pertaining to the Snack Food Division, as shown in Table 1 below, to calculate:

a. The economic profit for the division for 2000 and 2001.

b. The economic profit target for the division for 2001.

c. The division manager's bonus payout (% of salary) for 2000 and 2001. (Assume that the slope of the payoff line for 2000 was arbitrarily set by the Berkshire management to equal 1.0.)

3. Assume the base salary of the manager of the Snack Foods Division was 120,000 in both 2000 and 2001. How much cash would the manager receive from his bonus payouts in 2000 and 2001?

4. Evaluate the Berkshire Industries' new incentive plan. What changes would you recommend, if any?

5. What, if anything, should Mr. Embleton do about the problems caused by performance shortfalls in the Spirits Division in 2000 and 2001? Should Mr. Embleton make special adjustments of the economic profit figures or the bonus payouts for personnel in the Spirits Division in 2000 and 2001? Why or why not?

Assignment questions: 1. Were Berkshire's motivations for a new incentive system reasonable? If so, what were their main options for a new system? Was an economic profit-focused system a reasonable choice? 2. Use the data pertaining to the Snack Food Division, as shown in Table 1 below, to calculate: a. The economic profit for the division for 2000 and 2001. b. The economic profit target for the division for 2001. c. The division manager's bonus payout (% of salary) for 2000 and 2001. (Assume that the slope of the payoff line for 2000 was arbitrarily set by the Berkshire management to equal 1.0.) 3. Assume the base salary of the manager of the Snack Foods Division was 120,000 in both 2000 and 2001. How much cash would the manager receive from his bonus payouts in 2000 and 2001? 4. Evaluate the Berkshire Industries' new incentive plan. What changes would you recommend, if any? 5. What, if anything, should Mr. Embleton do about the problems caused by performance shortfalls in the Spirits Division in 2000 and 2001? Should Mr. Embleton make special adjustments of the economic profit figures or the bonus payouts for personnel in the Spirits Division in 2000 and 2001? Why or why not? Table 1 From the income statement: Net operating profit before the following items: Consumer advertising expense Goodwill amortization Net operating profit before taxes Income tax payments Net operating profit after taxes (NOPAT) From the balance sheet: Net operating assets (book): Accumulated amortization of goodwill Economic profit Economic profit performance target Established by management. 2 Division manager's bonus: Target bonus Bonus payout (% salary) Note: 1) Cumulative advertising expense through the end of 1997 is 181,410. 2) Cumulative advertising amortized through the end of the 1997 is 167,507. Operating Data from Berkshire Industries' Snack Foods Division (E000) 1996 1997 1998 1999 2000 (20,661) (23,730) 0 0 137,051 (26,410) 0 110,641 (41,293) 69,348 593,040 0 162,401 184,898 (31,007) (41,568) (15,000) (30,000) 116,394 113,330 (51,501) (54,131) 64,893 59,199 630,268 580,920 15,000 45,000 28,000 50% ? 2001 194,321 (39,191) (30,000) 125,130 (60,327) 64,803 568,113 75,000 50%