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Chapter 17: Problem 6

For years, the Goodyear Tire \& Rubber Company compensated its sales force by paying a salesperson a salary plus a bonus, based on the number of tires he or she sold. Eventually, Goodyear made two changes to this policy: (1) The basis for the bonus was changed from the quantity of tires sold to the revenue from the tires sold; and (2) salespeople were required to get approval from corporate headquarters in Akron, Ohio, before offering to sell tires to customers at reduced prices. Explain why these changes were likely to increase Goodyear's profits.

Short Answer

Expert verified
The changes made by Goodyear were likely to increase the company's profits because they incentivized salespeople to sell tires at higher prices and limited the frequency of discounts, increasing revenue per tire sold and, therefore, profits.

Step by step solution

01

Understand the Initial Compensation Structure

The first step is to understand the initial compensation structure: salespeople were paid a salary and a bonus based on the quantity of tires sold. This encouraged salespeople to sell as many tires as possible, regardless of the selling price.
02

Analyze the Impact of the First Change

Next, consider the impact of the first change: the basis for the bonus was altered from the quantity of tires sold to the revenue from the tires sold. This change in compensation structure incentivized salespeople to not only sell more tires but also to sell them at higher prices. In turn, this would increase Goodyear's revenue from tire sales.
03

Analyze the Impact of the Second Change

Then, consider the impact of the second change: salespeople were required to get approval from corporate headquarters before offering discounted prices. This change likely made it more difficult for salespeople to offer discounts, leading to higher average selling prices, and therefore, increasing Goodyear's revenue.
04

Consider the Combined Impact of Both Changes

Finally, consider the combined impact of both changes: through incentivizing higher selling prices (via a bonus based on sales revenue) and limiting discounts (via requiring approval for reduced prices), Goodyear likely saw increased revenue per tire sold and, consequently, higher profits.

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