Totara Inc. specializes in low-volume production orders. The three sales representative each receive a base salary plus a bonus based on 20% of the actual profit (gross margin) of each order they sell. The bonus used to be 5% of the revenues for each order sold.

Actual profit in the revised system was defined as actual revenue minus actual manufacturing cost. Totara uses a three-part classification of manufacturing costs direct materials, direct manufacturing labour, and indirect manufacturing costs. Indirect manufacturing costs are determined as 200% of actual direct manufacturing labour cost.

The sales manager receives a report on the XYZ job and is disappointed with its low profit. The three sales representatives share details of their most recent jobs.

Customer	WAT	LMP	XYZ
Sale Rep	#1	#2	#3
Revenues	$514	$982	$580
Direct materials	$300	$492	$324
Direct manuf. labour	$48	$120	$72
Indirect manufacturing	$96	$240	$144
Direct labour-hours	2	5	2

The sale representatives ask the manufacturing manager to explain the different labour costs charged on the WAT and XYZ jobs, given both used two direct labour-hours. The answer, the XYZ, not a rush job, was done in overtime and the actual rate ($36) was 50% higher than the $24 per hour straight-time rate.

In contrast, the WAT job was a rush order to be done by noon the day after receiving the order. The actual cost charged to the XYZ job was the $24 per hour straight-time rate.

Required (show all of your work):

1. Using both actual straight-time and overtime rates paid for direct labour, what is the actual profit Totara would report on each of the three jobs?
2. Assume that Totara charges $24 straight-time direct labour rate for each job (and the indirect-manufacturing rate of 200% includes an overtime premium). What would be the revised profit they would report for each of the three jobs? Comment on any differences from requirement 1.
3. Discuss the pros and cons of charging the XYZ job the $36 labour rate per hour.
4. Why might Totara adopt the 20% profit incentive instead of the prior 5% of revenue incentive? How might DMI define profit to reduce possible disagreements with its sales representatives?