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Question $1$:

The SoundSmart Corp is a service provider that sells conversation soundbites to

customers who are insecure in social situations. It is a subscription business model.

SoundSmart is customer$-$centric but has not yet embraced lifetime value as a metric.

Instead, customer profit is measured by "snapshot" period$-$by$-$period revenue net of the

$($direct$)$ variable cost of serving a customer.

A costumer segmentation analysis has shown that SoundSmart's customer base can be

divided into two segments: "Affluent" and "Mortals." Budgeted data for a given year is

as follows:

Annual fixed overhead cost is budgeted to be $$8$ million for any total number of

customers below $36,000.$ Above this customer volume, fixed overhead is expected to

increase to $$8\mathrm{.}2$ million because of additional office space needs. This budget is

communicated to all managers of the firm before the year starts.

Actual data at the end of the year is as follows:

Jill is SoundSmart's CEO. Her two key managers $-$ Horace $($marketing$)$ and Susan

$($operations$)-$ will earn a bonus if and only if they exceed expectations, i$.$e$.,$ if they beat

their respective budget. Jill regards any flexible$-$budget variances for fixed overhead costs

to be her sole responsibility.

Required:

a$.$ Suppose that under the current FP&A system, Horace is incentivized based

exclusively on revenue. Would he have earned a bonus?

b$.$ Suppose instead that Jill had revamped the FP&A system to one that better

aligns Horace's incentives with profit maximization $($as discussed in class$).$ Would

Horace now earn a bonus? Show your numbers and explain your findings.

c$.$ Would the operations manager Susan earn a bonus? Show your numbers and

explain your findings.

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