As noted in the chapter, Callaway Golf believes in tying executives* compensation to the company's performance as measured by accounting numbers. In a recent year. Callaway had agreed to pay its five executive officers bonuses of up to 200 percent of base salary if sales growth and pretax earnings as a percentage of sales (computed here) met or exceeded target amounts. Callaway's income statements for the relevant years are presented here.

Callaway executive * will receive bonuses it sales growth and pretax earnings us u percent ofsales meel or exceed t.n i amounts ( 35.1 percent and 21.1 percent, respectiv elv ). Meeting these goals in the current year would esult in bonuses tanging from S400.()(K) to $700.(XX) for each of the five executive officers, Required: 1. Use the preceding information to determine whether Callaway executives earned their bonuses in the most recent year presented. 2. Sales increased three years later by 22.6 percent to $678,512. What might explain the slower growth rate in this later year compared to the current year presented here?

Transcribed Image Text:

(in thousands, except per share data) Year Ended December 31, Current Year Prior Year Net sales $254.645 100% $132.058 100% Cost of goods sold 115,458 45% 62.970 48% Gross profit 139.187 55% 69.088 52% Selling expenses 38.485 15% 19,810 15% General and administrative expenses 28.633 11% 14,990 11% Research and development costs 3.653 1% 1,585 1% Income from operations 68,416 27% 32.703 25% Other income (expense) Interest income (expense), net 1,024 403 Other income, net 160 69 - Income before income taxes and cumulative effect of accounting change 69,600 27% 33.175 25% Provision for income taxes 28.396 13.895 Income before cumulative effect of accounting change 41.204 16% 19.280 15% Cumulative effect of accounting change 1.658 Net income $ 42.862 17% $ 19.280 15%