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Breaking Even and Calculating Bonuses

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Lesley Chomski is the supervisor of the New Product Division of MCO Corporation. Her annual bonus is based on the success of new products and it computed on the number of sales that exceed each new product's projected breakeven point. In reviewing the computations supporting her most recent bonus, Chomski found that although an order for 7,500 units of new product called R56 had been refused by a customer and returned to the company, the order had been included in the calculations. She later discovered that the company's accountant had labeled the return an overhead expense and had charged the entire cost of the return order to the plantwide Manufacturing Overhead account. The result was that R56 appeared to exceed breakeven by more than 5,000 units and Chomski's bonus from this product amount to over \$800.

As you can see Lesley's bonuses are tied directly to how many units she is able to sale over the breakeven point for each product line. After carefully considering what happened and why the breakeven was affected by the company's accountant leaving the sales units in place but charging the return to factory overhead answer the following questions and support your conclusion.

1) Even though fixed costs were increased by the return, why does it still appear that Lesley has sold more units then the breakeven point?

2) What actions should Lesley take to correct the situation, if any? Why?

Solution Preview

1) The main reason why it appears that Lesley has sold more units then the break-even point is due to the fact that the return of the product R6 was charged to another account. Therefore, it makes it ...

Solution Summary

This solution discusses the issues that arise when an employee appears to have sold more than the break even point.

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Calculating the break even bonus amount

Your salary for the coming year is \$100,000 (payable one year from now) and you expect to work for another 30 years. You expect your annual base salary to grow at a 4% annual rate during the remainder of your career. Your company's pension plan calls for you to receive a yearly pension payment after you retire equal to 25% of your final year's base salary. The first payment will be made one year after your retirement, and you expect to live for twenty years after your retirement. The interest rate is 8% per year.
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