Industrial Electronics, Inc. Acctg Case
The current bonus system also only allows for bonuses to be distributed if there are profits more than 10% (after taxes) in …show more content…
While statistic forecasting is a thorough process, it is still an estimate and is usually never dead-on accurate. Therefore, since the economic profit objective is based purely on budgeted numbers, and is then used with actual economic profit to determine the difference, if the forecasted numbers are wrong (or something like an unforeseeable occurrence like a natural disaster were to occur), the bonus system would fail.
Another negative aspect of this bonus structure is the loss of the company wide all-for-one bonus mentality. One division of the company (such as Division B) can have a great year and earn a lot of money while another division (such as Division E) can have a poor year and not earn as great a bonus.
Positively, this bonus structure takes into account the difference in division sizes, as it is based on forecasts and actual numbers. Therefore a small division can do well as compared to the budgeted numbers whereas with the previous structure, a small division would not have a very big impact at all on total bottom line of the entire company. This also relates to the fact that each division is rewarded for their own success. So if a division were to have an above-average year that division would be properly rewarded with a great bonus, even if the company as a whole didn't perform as admirably. This does lead to another potential pitfall of this proposed bonus structure interdependence of the divisions. Divisions have the