Pacific-Dunlop supplies tires to major automotive companies. It has two tire plants in Ontario, in Kitchener and Napanee. The quarterly bonus plan for each plant manager has three components:
a. Profitability performance. Add 2% of operating income.
b. On-time delivery performance. Add $12,000 if on-time delivery performance to the ten most important customers is 98% or better. If on-time performance is below 98%, add nothing.
c. Product quality performance. Deduct 50% of cost of sales returns from the ten most important customers.
Quarterly data for 2012 on the Kitchener and Napanee plants are as follows:
1. Compute the bonuses paid in each quarter of 2012 to the plant managers of the Kitchener and Napanee plants.
2. Discuss the three components of the bonus plan as measures of profitability, on-time delivery, and product quality.
3. Why would you want to evaluate plant managers on the basis of both operating income and on-time delivery?
4. Give one example of what might happen if on-time delivery were dropped as a performance evaluation measure.