The owners of a small manufacturing company have hired a manager to run the company with...

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The owners of a small manufacturing company have hired a managerto run the company with the expectation that the new manager willbuy the company after 3 years. Compensation of the new vicepresident is a flat salary of $100,000 plus 50% of the first$200,000 profit, then 10% of profit over $200,000. When the newmanager purchases the company, he will be required to pay 5 timesthe average annual profitability of the 3 year period. 1. Plot theannual compensation of the VP as a function of annual profit.(Place profit on the horizontal axis and compensation on thevertical axis.) 2. Assume the company will be worth $10 million in3 years. Plot the profit of buying the company as a function ofannual profit. (Profit from purchase= Value â€“ Price Paid) 3. Doesthis contract align the incentives of the new VP with theprofitability goals of the current owners? 4. Redesign the contractto better align the incentives of the new VP with the profitabilitygoals of the owners.

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NOTE As the Quantitative details of theannual profits is not given in the question we have done thecalculation at various assumed profit levels1Profit levelsFixed Salary of See Answer

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