Chapter 12, Problem 50P

1. a

To determine

Compute the semiannual installments and total bonus awarded for Charter division.

Explanation of Solution

Gain sharing plan: A gain sharing plan is an incentive system that indicates a formula by which cost or productivity gains attained by a company are shared with the employees who assisted for accomplishing the improvements.

Compute the semiannual installments and total bonus:

Charter Division
Gain-Sharing Bonus Calculation
For The Year Ended December 31
First installment, January–June:
Profitability  (1)	$9,240
Rework (2)	($2,260)
On-time delivery ( NOTE 1)	$0
Sales returns (3)	($10,500)
Semiannual installment	($3,520)
First semiannual bonus awarded		$0
Second installment, July–December:
Profitability  (4)	$8,800
Rework (5)	($2,200)
On-time delivery ( NOTE 2)	$2,000
Sales returns (6)	($2,000)
Semiannual installment	$6,600
Second semiannual bonus awarded		$6,600
Total bonus awarded for the year		$6,600

Table (1)

Working notes:

(1)Calculate the profitability for the first installment:

$\begin{array}{c}\begin{array}{l}\text{Profitability}\text{for}\\ \text{second}\text{installment}\end{array}\}\text{=}\text{Percent}\text{of}\text{operating}\text{income}\text{×}\text{Operating}\text{income}\\ \text{=}\text{2\%}\text{×}\text{\$462,000}\\ \text{=\$9,240}\end{array}$

(2)Calculate the amount of rework for the first installment:

$\begin{array}{c}\begin{array}{l}\text{Amount}\text{of}\text{rework}\text{for}\\ \text{first}\text{installment}\end{array}\}\text{=}\left[\left(\begin{array}{l}\text{Percent}\text{of}\text{operating}\text{income}\text{×}\\ \text{Operating}\text{income}\end{array}\right)-\text{Rework}\text{costs}\right]\\ \text{=}\left[\left(\begin{array}{l}\text{2}\text{\%}\text{×}\\ \text{\$462,000}\end{array}\right)-\text{\$11,500}\right]\\ \text{=\$9,240}-\text{\$11,500}\\ \text{=}-\text{\$2,260}\end{array}$

(3)Calculate the amount of sales returns for first installment:

$\begin{array}{c}\text{Sales}\text{returns}\text{=}\left\{\left[\left(\text{Percent}\text{of}\text{return}\text{on}\text{sales}\text{×}\text{sales}\right)-\text{sales}\text{returns}\right]\text{×}\text{50}\text{\%}\right\}\\ \text{=}\left\{\left[\left(\text{1}\text{.5}\text{\%}\text{×}\text{\$4,200,000}\right)-\text{\$84,000}\right]\text{×}\text{50}\text{\%}\right\}\\ \text{=}\left(\text{\$63,000}-\text{\$84,000}\right)\text{×}\text{50}\text{\%}\\ \text{=}-\text{\$10,500}\end{array}$

Note 1: Increment for on-time delivery is zero since there is no increment if on-time deliveries are below 96 percent.

(4)Calculate the profitability for the second installment:

$\begin{array}{c}\begin{array}{l}\text{Profitability}\text{for}\\ \text{second}\text{installment}\end{array}\}\text{=}\text{Percent}\text{of}\text{operating}\text{income}\text{×}\text{Operating}\text{income}\\ \text{=}\text{2\%}\text{×}\text{\$440,000}\\ \text{=\$8,880}\end{array}$

(5)Calculate the amount of rework for the second installment:

$\begin{array}{c}\begin{array}{l}\text{Amount}\text{of}\text{rework}\text{for}\\ \text{second}\text{installment}\end{array}\}\text{=}\left[\left(\begin{array}{l}\text{Percent}\text{of}\text{operating}\text{income}\text{×}\\ \text{Operating}\text{income}\end{array}\right)-\text{Rework}\text{costs}\right]\\ \text{=}\left[\left(\begin{array}{l}\text{2}\text{\%}\text{×}\\ \text{\$440,000}\end{array}\right)-\text{\$11,000}\right]\\ \text{=\$8,800}-\text{\$11,000}\\ \text{=}-\text{\$2,200}\end{array}$

(6)Calculate the amount of sales for second installment returns:

$\begin{array}{c}\text{Sales}\text{returns}\text{=}\left\{\left[\left(\text{Percent}\text{of}\text{return}\text{on}\text{sales}\text{×}\text{sales}\right)-\text{sales}\text{returns}\right]\text{×}\text{50}\text{\%}\right\}\\ \text{=}\left\{\left[\left(\text{1}\text{.5}\text{\%}\text{×}\text{\$4,400,000}\right)-\text{\$70,000}\right]\text{×}\text{50}\text{\%}\right\}\\ \text{=}\left(\text{\$66,000}-\text{\$70,000}\right)\text{×}\text{50}\text{\%}\\ \text{=}-\text{\$2,000}\end{array}$

Note 2: If deliveries are 96 to 98 percent on time, then $2,000 is the amount of increment.

1. b

To determine

Discuss the likely behavior of the charter division employees under the revised bonus plan.

Explanation of Solution

• The employees of the charter division are likely to be irritated by the new plan, as the division bonus is $20,000 less than previous year, if sales and operating income are same. Conversely, both on-time deliveries and sales return enhanced in the second half of the year, although rework costs are moderately even.
• If the decision continues to improve at the similar rate, the bonus of charter division will estimate or exceed than what it was under the previous plan. The only question in this case is whether the employees have enough motivation to effect improvement.

2. a

To determine

Compute the semiannual installments and total bonus awarded for Mesa division.

Explanation of Solution

Gain sharing plan: A gain sharing plan is an incentive system that indicates a formula by which cost or productivity gains attained by a company are shared with the employees who assisted for accomplishing the improvements.

Compute the semiannual installments and total bonus:

Mesa Division
Gain-Sharing Bonus Calculation
For the Year Ended December 31
First installment, January-June
Profitability (7)	$6,840
Rework ( NOTE 3)	$0
On-time delivery ( NOTE 4)	$5,000
Sales returns (8)	($1,000)
Semiannual installment	$10,840
First semiannual bonus awarded		$10,840
Second installment, July-December:
Profitability (10)	$8,120
Rework ( NOTE 5)	$0
On-time delivery ( NOTE 7)	$0
Sales returns ( NOTE 6)	$3,000
Semiannual installment	$11,120
Second semiannual bonus awarded		$11,120
Total bonus awarded for the year		$21,960

Table (2)

Working notes:

(7)Calculate the profitability for the first installment:

$\begin{array}{c}\begin{array}{l}\text{Profitability}\text{for}\\ \text{second}\text{installment}\end{array}\}\text{=}\text{Percent}\text{of}\text{operating}\text{income}\text{×}\text{Operating}\text{income}\\ \text{=}\text{2\%}\text{×}\text{\$342,000}\\ \text{=\$6,840}\end{array}$

(8)Calculate the amount of rework for the first installment:

$\begin{array}{c}\begin{array}{l}\text{Amount}\text{of}\text{rework}\text{for}\\ \text{first}\text{installment}\end{array}\}\text{=}\left[\left(\begin{array}{l}\text{Percent}\text{of}\text{operating}\text{income}\text{×}\\ \text{Operating}\text{income}\end{array}\right)-\text{Rework}\text{costs}\right]\\ \text{=}\left[\left(\begin{array}{l}\text{2}\text{\%}\text{×}\\ \text{\$342,000}\end{array}\right)-\text{\$6,000}\right]\\ \text{=\$6,840}-\text{\$6,000}\\ \text{=}\text{\$840}\text{.}\end{array}$

Note 3: In this case, amount of rework cost is zero because the rework costs must not be in excess of 2 percent of operating income and if it exceeds the 2 percent of operating income, it is deducted from bonus.

(9)Calculate the amount of sales returns for first installment:

$\begin{array}{c}\text{Sales}\text{returns}\text{=}\left\{\left[\left(\text{Percent}\text{of}\text{return}\text{on}\text{sales}\text{×}\text{sales}\right)-\text{sales}\text{returns}\right]\text{×}\text{50}\text{\%}\right\}\\ \text{=}\left\{\left[\left(\text{1}\text{.5}\text{\%}\text{×}\text{\$2,850,000}\right)-\text{\$44,750}\right]\text{×}\text{50}\text{\%}\right\}\\ \text{=}\left(\text{\$42,750}-\text{\$44,750}\right)\text{×}\text{50}\text{\%}\\ \text{=}-\text{\$1,000}\end{array}$

Note 4: Increment for on-time delivery is $5,000 since on-time deliveries are above 98 percent.

(10)Calculate the profitability for the second installment:

$\begin{array}{c}\begin{array}{l}\text{Profitability}\text{for}\\ \text{second}\text{installment}\end{array}\}\text{=}\text{Percent}\text{of}\text{operating}\text{income}\text{×}\text{Operating}\text{income}\\ \text{=}\text{2\%}\text{×}\text{\$406,000}\\ \text{=\$8,120}\end{array}$

(11)Calculate the amount of rework for the second installment:

$\begin{array}{c}\begin{array}{l}\text{Amount}\text{of}\text{rework}\text{for}\\ \text{second}\text{installment}\end{array}\}\text{=}\left[\left(\begin{array}{l}\text{Percent}\text{of}\text{operating}\text{income}\text{×}\\ \text{Operating}\text{income}\end{array}\right)-\text{Rework}\text{costs}\right]\\ \text{=}\left[\left(\begin{array}{l}\text{2}\text{\%}\text{×}\\ \text{\$406,000}\end{array}\right)-\text{\$8,000}\right]\\ \text{=\$8,120}-\text{\$8,000}\\ \text{=}\text{\$120}\text{.}\end{array}$

Note 5: In this case, amount of rework cost is zero because the rework costs must not be in excess of 2 percent of operating income and if it exceeds the 2 percent of operating income, it is deducted from bonus.

(12)Calculate the amount of sales returns for second installment:

$\begin{array}{c}\text{Sales}\text{returns}\text{=}\left\{\left[\left(\text{Percent}\text{of}\text{return}\text{on}\text{sales}\text{×}\text{sales}\right)-\text{sales}\text{returns}\right]\text{×}\text{50}\text{\%}\right\}\\ \text{=}\left\{\left[\left(\text{1}\text{.5}\text{\%}\text{×}\text{\$2,900,000}\right)-\text{\$42,500}\right]\text{×}\text{50}\text{\%}\right\}\\ \text{=}\left(\text{\$43,500}-\text{\$42,500}\right)\text{×}\text{50}\text{\%}\\ \text{=}\text{\$500}\end{array}$

Note 6: The amount of sales returns in this case is $3,000 because returns are less than 1.5 percent of sales.

Note 7: Increment for on-time delivery is $5,000 since on-time deliveries are above 98 percent.

2. b

To determine

Discuss the likely behavior of the Mesa division employees under the revised bonus plan.

Explanation of Solution

• The employees of the mesa division must be satisfied with the new plan as they were contented with the old plan, since the amount of bonus is almost equivalent. Conversely, there is no sign of improvements in this division; on-time deliveries are significantly decreased in the second half of the year.
• Thus, the bonus state might not be favorable in the future. Declined bonus can motivate the employees to enhance, or they could irritate employees and destabilize their motivation.

3.

To determine

Evaluate whether Person H’s revisions to the bonus plan at Corporation M have achieved the desired results, and recommend any changes that improve the plan.

Explanation of Solution

Person H’s bonus plan for charter division fostered improvements which includes the following:

• Decrease in work costs of $500.
• Increase of on-time deliveries by 1.9 percent.
• Decrease in sales returns of $14,000.

On the other hand, operating income remained at the stated quote. The effect of the revised plan at Corporation M is offset by the following:

• Increase in work costs of $2,000.
• Decrease in sales returns of $2,250.
• Reduction of 3.6 percent on time deliveries.
• Increase of 2 percent operating income as a percentage of sales from 12 to 14 percent.

To conclude, these results recommend that the gain-sharing bonus plan requires revision.

Following are the recommendations:

• Developing bench marks and providing rewards for enhancements over previous periods and motivating continues improvement.
• Making a reward structure for rework costs that are under 2 percent of operating income that encourages employees to drive costs lower.
• Revising the whole year in total. The bonus plan must carry forward the negative amounts for one six-month period into the next six-month period, combining the entire year when computing a bonus.