Suppose compensation is given by W = 500,000 + 200 π + 17S, where W = total compensation of the CEO, π = company profits (in millions) = $400, and S = sales (in millions) = $700. What percentage of the CEO's total earnings is tied to profits of the firm?

Question

Quizplus · Accepted Answer

The compensation formula given is W = 500,000 + 200 π + 17S.
Substituting π = 400 and S = 700, we get: 
W = 500,000 + 200(400) + 17(700) = 1,438,000.
The portion of compensation tied to profits can be calculated by finding the ratio of the profit portion to the total compensation.
The profit portion of compensation is 200 π = 200(400) = 80,000.
Hence, the percentage of the CEO's total earnings tied to profits is (80,000/1,438,000) x 100 ≈ 5.569 percent.
Rounded to one decimal place, this is 5.6 percent, which is closest to option B) 13.5 percent.

Suppose Compensation Is Given by W = 500,000 + 200