Hightech Industries specializes in manufacturing medical equipment, a field that has become increasingly competitive Last year, Pedro Rodriguez, president of Hightech, decided to revise the bonus plan (based entirely on operating income at the time) to encourage division managers to focus on areas that were important to customers and that added value without increasing cost In addition to introducing a profitability incentive, the revised plan includes incentives for reduced rework costs, reduced sales returns, and on time deliveries The company's new plan calculates and awards bonuses semi annually on the following basis a base bonus is calculated at 2 of operating income this amount is then adjusted by the following factors related to rework, deliveries, and sales returns Rework The bonus is reduced by excess of rework costs above 2 of operating income No adjustment is made if rework costs are less than or equal to 2 of operating income Deliveries The bonus is increased by $4,000 if more than 98 of deliveries are on time and by $1,500 if 96 98 of deliveries are on time No adjustment is made if on time deliveries are below 96 Sales Returns The bonus is increased by $2,500 if sales returns are less than or equal to 1 5 of sales The bonus is decreased by 50 if sales returns are over 1 5 of sales Note If the calculation of the bonus results in a negative amount for a period, the manager simply receives no bonus, and the negative amount does not carry forward to the next period QUESTION Why is revenue alone not an ideal measure of performance What specifically about the revised performance measures compels the managers of the East and West divisions to pursue the company's goals

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Posted on Jun 25, 2024

Hightech Industries specializes in manufacturing medical equipment, a field that has become increasingly competitive. Last year, Pedro Rodriguez, president of Hightech, decided to revise the

Hightech Industries specializes in manufacturing medical equipment, a field that has become increasingly competitive. Last year, Pedro Rodriguez, president of Hightech, decided to revise the bonus plan (based entirely on operating income at the time) to encourage division managers to focus on areas that were important to customers and that added value without increasing cost. In addition to introducing a profitability incentive, the revised plan includes incentives for reduced rework costs, reduced sales returns, and on-time deliveries. The company's new plan calculates and awards bonuses semi-annually on the following basis: a base bonus is calculated at 2% of operating income; this amount is then adjusted by the following factors related to rework, deliveries, and sales returns:

Rework

The bonus is reduced by excess of rework costs above 2% of operating income
No adjustment is made if rework costs are less than or equal to 2% of operating income.

Deliveries

The bonus is increased by $4,000 if more than 98% of deliveries are on time and by $1,500 if 96-98% of deliveries are on time.
No adjustment is made if on-time deliveries are below 96%.

Sales Returns

The bonus is increased by $2,500 if sales returns are less than or equal to 1.5% of sales.
The bonus is decreased by 50% if sales returns are over 1.5% of sales.

Note:If the calculation of the bonus results in a negative amount for a period, the manager simply receives no bonus, and the negative amount does not carry forward to the next period.

QUESTION: Why is revenue alone not an ideal measure of performance? What specifically about the revised performance measures compels the managers of the East and West divisions to pursue the company's goals?