The shareholders of X Ltd. are unhappy about the top manager's performance. While themanager's effort in running the firm cannot be observed, it is felt that he or she puts in effortamounting to about 40 hours a week. The manager's annual salary at present is $136,900.A new incentive contract is being considered by the shareholders, whereby the manager wouldreceive a salary of $90,000 per annum plus a bonus of 15% of reported net income before salaryand bonus.You are asked to analyze the expected impact of the new bonus plan on the manager. Here thepayoff table.a Work 60 hoursa Work 40 hours2.Net Income*Prob.Net Income*Prob.$936,000$936,0000.1High PayoffLow PayoffBefore Salary and Bonuses0.7$74,1600.3S74,1600.9You also ascertain that the manager's utility for money is equal to the square root of the moneyreceived, and his (or her) disutility of effort is four times the number of hours worked per week(i.e. 40hours x 4-160).Requireda) Show calculations to verify that, under the present salary-based remuneration plan, themanager will prefer to work 40 hours per week over 60 hours.b) Which act, a, (60 hours per week) or a, (40 hours per week), will the manager prefer underthe new incentive contract? Show calculations.c) A new accounting standard is proposed that, while it will not change future expected netincome, will greatly increase its volatility (i.e., reduce the precision). Explain why themanager would object to the proposed new standard.

Remuneration - An employee's overall compensation is known as their remuneration. It covers not just…

The shareholders of X Ltd. are unhappy about the top manager's performance. While the manager's effort in running the firm cannot be observed, it is felt that he or she puts in effort amounting to about 40 hours a week. The manager's annual salary at present is $136,900. A new incentive contract is being considered by the shareholders, whereby the manager would receive a salary of $90,000 per annum plus a bonus of 15% of reported net income before salary and bonus. You are asked to analyze the expected impact of the new bonus plan on the manager. Here the payoff table.

The shareholders of X Ltd. are unhappy about the top manager's performance. While the manager's effort in running the firm cannot be observed, it is felt that he or she puts in effort amounting to about 40 hours a week. The manager's annual salary at present is $136,900. A new incentive contract is being considered by the shareholders, whereby the manager would receive a salary of $90,000 per annum plus a bonus of 15% of reported net income before salary and bonus. You are asked to analyze the expected impact of the new bonus plan on the manager. Here the payoff table.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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