The Star Mug Company is an old-line maker of ceramic coffee mugs. It imprints company logos and other sayings on mugs for both commercial and wholesale markets. The firm has the capacity to produce 50 million mugs per year, but the recession has cut production and sales in the current year to 15 million mugs. The accompanying table shows the operating statement for 2020. At the end of 2020, there was no ending inventory of finished goods. The board of directors is very concerned about the $1.5 million operating loss. It hires an outside consultant who reports back that the firm suffers from two problems. First, the president of the company receives a fixed salary, and since she owns no stock, she has very little incentive to worry about company profits. The second problem is that the company has not aggressively marketed its product and has not kept up with changing markets. The current president is 64 years old, and the board of directors makes her an offer to retire one year early so that they can hire a new president to turn the firm around. The current president accepts the offer to retire, and the board immediately hires a new president with a proven track record as a turnaround specialist. The new president is hired with an employment contract that pays a fixed wage of $50,000 a year plus 15 percent of the firms operating profits (if any). Operating profits are calculated using absorption costing. In 2021, the new president doubles the selling and administration budget to $8 million (which includes the presidents salary of $50,000). He designs a new line of politically correct sayings to imprint on the mugs and expands inventory and the number of distributors handling the mugs. Production is increased to 45 million mugs and sales climb to 18 million mugs at $2 each. Variable costs per mug remain at $0.50 and fixed costs at $20 million in 2021. At the end of 2021, the president meets with the board of directors and announces he has accepted another job. He believes he has successfully gotten Star Mug back on track and thanks the board for giving him the opportunity. His new job is helping to turn around another struggling company.

The Star Mug Company Income Statement Year ended 31 December 2020 $million $million Sales revenue (15 million mugs @ $2 each) 30.0. LESS cost of goods sold Variable cost (15 million mugs @ $0.50 each) (7.5) Fixed cost (20.0) (27.5) Gross margin 2.5. LESS selling and administration (4.0) Operating profit (1.5) Tasks a) Calculate the presidents bonus for 2021. b) Calculate the presidents bonus for 2021 if the production volume were 18 million mugs resulting in no ending inventory in 2021. c) Evaluate the performance of the new president in 2021. Did he do a good job as the numbers in (a) suggests?