Question

After three profitable years, Dodd Co. decided to offer a bonus to its branch manager, Cone, of 25% of income over $100,000 earned by his branch. For the year 20X2, income for Cone's branch was $160,000 before income taxes and Cone's bonus. Cone's bonus is computed on income in excess of $100,000 after deducting the bonus, but before deducting taxes. What is Cone's bonus for the year 20X2

Answer 1

Answer:

$12,000

Explanation:

our EBIT (and before bonus also) = $160,000

income threshold = $100,000

bonus = 25% of (EBIT - threshold - bonus itself)

so now, we have to solve the following equation:

bonus = 25% x (EBIT - income threshold - bonus)

bonus = 25% x ($160,000 - $100,000 - bonus)

bonus = $15,000 - 0.25bonus

1.25bonus = $15,000

bonus = $15,000 / 1.25 = $12,000