Accounting for Decision Making and Control 7th Edition by Jerold Zimmerman

Exercise 25

Republic Insurance
Republic Insurance has a direct sales force that sells life insurance policies. All salespeople at the beginning of the year forecast the number of policies they expect to sell that year. At the end of the year, they are evaluated based on how many policies they actually sell. The compensation scheme is based on the following formula:
Total compensation = $20,000 + $100B + $20(5 - B) if S B
$20,000 + $100B - $400(B - S ) if S
where
B = Budgeted number of policies reported by the manager
S = Actual number of policies sold
Required:
a. Suppose a particular salesperson expects to sell 100 policies. This salesperson is considering reporting budgeted policies of 90, 99, 100, 101, 102, and 110. What level of budgeted policy sales should this person report at the beginning of the year?
b. Critically analyze the Republic Insurance compensation scheme.