1. a
Compute the semiannual installments and total bonus awarded for Charter division.
1. a
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:
(2)Calculate the amount of rework for the first installment:
(3)Calculate the amount of sales returns for first installment:
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:
(5)Calculate the amount of rework for the second installment:
(6)Calculate the amount of sales for second installment returns:
Note 2: If deliveries are 96 to 98 percent on time, then $2,000 is the amount of increment.
1. b
Discuss the likely behavior of the charter division employees under the revised bonus plan.
1. b
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
Compute the semiannual installments and total bonus awarded for Mesa division.
2. a
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:
(8)Calculate the amount of rework for the first installment:
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:
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:
(11)Calculate the amount of rework for the second installment:
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:
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
Discuss the likely behavior of the Mesa division employees under the revised bonus plan.
2. b
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.
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.
3.
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.
Want to see more full solutions like this?
Chapter 12 Solutions
Managerial Accounting: Creating Value in a Dynamic Business Environment
- Financial and nonnancial performance measures, goal congruence. (CMA, adapted) Precision Equipment specializes in the manufacture of medical equipment, a eld that has become increasingly competitive. Approximately 2 years ago, Pedro Mendez, president of Precision, decided to revise the bonus plan (based, at the time, entirely on operating income) to encourage division managers to focus on areas that were important to customers and that added value without increasing cost. In addition to a protability incentive, the revised plan includes incentives for reduced rework costs,reduced sales returns, and ontime deliveries. The company calculates and rewards bonuses semiannually on the following basis: A base bonus is calculated at 2% of operating income; this amount is then adjusted as follows:arrow_forwardPain is Good Company manufactures a line of premium hot sauces. The company’s managers would like to increase the operating income generated from its best selling sauce Rajin’ Cajun. The product’s sales staff is doubtful that the current customer base would accept a price increase. However, they are confident that the product’s customer base can be expanded without incurring any additional costs. Management has concluded after consulting with key members of the product’s manufacturing and sales teams that all costs for the product line are currently at the lowest level possible. Given the following information for the Rajin’ Cajun line, what is management’s best option for increasing the product line’s operating income by $10,000? Sales Price . . . $5.00 Unit Fixed Cost at current sales volume . . . $0.50 Total Variable Costs at current sales volume . . . $8,750 Current Sales Volume . . . 5,000 units A. Eliminate fixed costs and decrease variable cost per…arrow_forwardJacobs Inc. is a relatively new company that has established a position in the highly competitive biotechnology industry. Which of the following statements is correct regarding Jacobs’ profitability? Profits will increase when buyers have lower switching costs. Significant up-front capital requirements for new entrants will help Jacobs’ profit margins. Profitability is diminished when there are many suppliers. Rival firms willing to spend a lot of money on advertising will increase Jacobs’ profitsarrow_forward
- The D division of A-MART sells batteries. A-MART’s corporate management gives themanagement of D division considerable operating and investment autonomy in running the division.A-MART is considering how it should compensate James Mak, the general manager of the Ddivision:(a) Proposal 1 calls for paying Mak a fixed salary.(b) Proposal 2 calls for paying Mak no salary and compensate him only on the basis of thedivision’s ROI, calculated based on operating income before any bonus payments.(c) Proposal 3 calls for paying Mak some salary and some bonus based on ROI. Assume thatMak does not like bearing risk.Required:1. Evaluate the three proposals, specifying the pros and cons of each.2. Suppose that A-MART competes against Texaco Industries in the battery business. Texaco isapproximately the same size as the D division and operates in a business environment that issimilar to D’s. The top management of A-MART is considering evaluating Mak on the basisof D’s ROI minus Texaco’s ROI. Mak…arrow_forwardMaxwell Company produces a variety of kitchen appliances, including cooking ranges and dishwashers. Over the past several years, competition has intensified. In order to maintainand perhaps increaseits market share, Maxwells management decided that the overall quality of its products had to be increased. Furthermore, costs needed to be reduced so that the selling prices of its products could be reduced. After some investigation, Maxwell concluded that many of its problems could be traced to the unreliability of the parts that were purchased from outside suppliers. Many of these components failed to work as intended, causing performance problems. Over the years, the company had increased its inspection activity of the final products. If a problem could be detected internally, then it was usually possible to rework the appliance so that the desired performance was achieved. Management also had increased its warranty coverage; warranty work had been increasing over the years. David Haight, president of Maxwell Company, called a meeting with his executive committee. Lee Linsenmeyer, chief engineer; Kit Applegate, controller; and Jeannie Mitchell, purchasing manager, were all in attendance. How to improve the companys competitive position was the meetings topic. The conversation of the meeting was recorded as seen on the following page: DAVID: We need to find a way to improve the quality of our products and at the same time reduce costs. Lee, you said that you have done some research in this area. Would you share your findings? LEE: As you know, a major source of our quality problems relates to the poor quality of the parts we acquire from the outside. We have a lot of different parts, and this adds to the complexity of the problem. What I thought would be helpful would be to redesign our products so that they can use as many interchangeable parts as possible. This will cut down the number of different parts, make it easier to inspect, and cheaper to repair when it comes to warranty work. My engineering staff has already come up with some new designs that will do this for us. JEANNIE: I like this idea. It will simplify the purchasing activity significantly. With fewer parts, I can envision some significant savings for my area. Lee has shown me the designs so I know exactly what parts would be needed. I also have a suggestion. We need to embark on a supplier evaluation program. We have too many suppliers. By reducing the number of different parts, we will need fewer suppliers. And we really dont need to use all the suppliers that produce the parts demanded by the new designs. We should pick suppliers that will work with us and provide the quality of parts that we need. I have done some preliminary research and have identified five suppliers that seem willing to work with us and assure us of the quality we need. Lee may need to send some of his engineers into their plants to make sure that they can do what they are claiming. DAVID: This sounds promising. Kit, can you look over the proposals and their estimates and give us some idea if this approach will save us any money? And if so, how much can we expect to save? KIT: Actually, I am ahead of the game here. Lee and Jeannie have both been in contact with me and have provided me with some estimates on how these actions would affect different activities. I have prepared a handout that includes an activity table revealing what I think are the key activities affected. I have also assembled some tentative information about activity costs. The table gives the current demand and the expected demand after the changes are implemented. With this information, we should be able to assess the expected cost savings. Additionally, the following activity cost data are provided: Purchasing parts: Variable activity cost: 30 per part number; 20 salaried clerks, each earning a 45,000 annual salary. Each clerk is capable of processing orders associated with 100 part numbers. Inspecting parts: Twenty-five inspectors, each earning a salary of 40,000 per year. Each inspector is capable of 2,000 hours of inspection. Reworking products: Variable activity cost: 25 per unit reworked (labor and parts). Warranty: Twenty repair agents, each paid a salary of 35,000 per year. Each repair agent is capable of repairing 500 units per year. Variable activity costs: 15 per product repaired. Required: 1. Compute the total savings possible as reflected by Kits handout. Assume that resource spending is reduced where possible. 2. Explain how redesign and supplier evaluation are linked to the savings computed in Requirement 1. Discuss the importance of recognizing and exploiting internal and external linkages. 3. Identify the organizational and operational activities involved in the strategy being considered by Maxwell Company. What is the relationship between organizational and operational activities?arrow_forwardAt the beginning of the last quarter of 20x1, Youngston, Inc., a consumer products firm, hired Maria Carrillo to take over one of its divisions. The division manufactured small home appliances and was struggling to survive in a very competitive market. Maria immediately requested a projected income statement for 20x1. In response, the controller provided the following statement: After some investigation, Maria soon realized that the products being produced had a serious problem with quality. She once again requested a special study by the controllers office to supply a report on the level of quality costs. By the middle of November, Maria received the following report from the controller: Maria was surprised at the level of quality costs. They represented 30 percent of sales, which was certainly excessive. She knew that the division had to produce high-quality products to survive. The number of defective units produced needed to be reduced dramatically. Thus, Maria decided to pursue a quality-driven turnaround strategy. Revenue growth and cost reduction could both be achieved if quality could be improved. By growing revenues and decreasing costs, profitability could be increased. After meeting with the managers of production, marketing, purchasing, and human resources, Maria made the following decisions, effective immediately (end of November 20x1): a. More will be invested in employee training. Workers will be trained to detect quality problems and empowered to make improvements. Workers will be allowed a bonus of 10 percent of any cost savings produced by their suggested improvements. b. Two design engineers will be hired immediately, with expectations of hiring one or two more within a year. These engineers will be in charge of redesigning processes and products with the objective of improving quality. They will also be given the responsibility of working with selected suppliers to help improve the quality of their products and processes. Design engineers were considered a strategic necessity. c. Implement a new process: evaluation and selection of suppliers. This new process has the objective of selecting a group of suppliers that are willing and capable of providing nondefective components. d. Effective immediately, the division will begin inspecting purchased components. According to production, many of the quality problems are caused by defective components purchased from outside suppliers. Incoming inspection is viewed as a transitional activity. Once the division has developed a group of suppliers capable of delivering nondefective components, this activity will be eliminated. e. Within three years, the goal is to produce products with a defect rate less than 0.10 percent. By reducing the defect rate to this level, marketing is confident that market share will increase by at least 50 percent (as a consequence of increased customer satisfaction). Products with better quality will help establish an improved product image and reputation, allowing the division to capture new customers and increase market share. f. Accounting will be given the charge to install a quality information reporting system. Daily reports on operational quality data (e.g., percentage of defective units), weekly updates of trend graphs (posted throughout the division), and quarterly cost reports are the types of information required. g. To help direct the improvements in quality activities, kaizen costing is to be implemented. For example, for the year 20x1, a kaizen standard of 6 percent of the selling price per unit was set for rework costs, a 25 percent reduction from the current actual cost. To ensure that the quality improvements were directed and translated into concrete financial outcomes, Maria also began to implement a Balanced Scorecard for the division. By the end of 20x2, progress was being made. Sales had increased to 26,000,000, and the kaizen improvements were meeting or beating expectations. For example, rework costs had dropped to 1,500,000. At the end of 20x3, two years after the turnaround quality strategy was implemented, Maria received the following quality cost report: Maria also received an income statement for 20x3: Maria was pleased with the outcomes. Revenues had grown, and costs had been reduced by at least as much as she had projected for the two-year period. Growth next year should be even greater as she was beginning to observe a favorable effect from the higher-quality products. Also, further quality cost reductions should materialize as incoming inspections were showing much higher-quality purchased components. Required: 1. Identify the strategic objectives, classified by the Balanced Scorecard perspective. Next, suggest measures for each objective. 2. Using the results from Requirement 1, describe Marias strategy using a series of if-then statements. Next, prepare a strategy map. 3. Explain how you would evaluate the success of the quality-driven turnaround strategy. What additional information would you like to have for this evaluation? 4. Explain why Maria felt that the Balanced Scorecard would increase the likelihood that the turnaround strategy would actually produce good financial outcomes. 5. Advise Maria on how to encourage her employees to align their actions and behavior with the turnaround strategy.arrow_forward
- Harry Haney, manager of the Eastern Division of MertockCo., made the following comment to the manager of theCentral Division: It’s all well and good for you to say that I should dis-regard sunk costs when I consider whether to replace the old, inefficient equipment with new, more efficientequipment. But my performance evaluation is based onnet operating profits divided by total assets. The newequipment will increase my total asset base and lowerthe ratio of profits to assets, hurting my performance.Thus, I will not sell the old equipment.Do you agree with Haney’s statement? Why or why not?arrow_forwardVideo Tech Ltd manufactures video game machines. Market saturation and technological innovations have caused pricing pressures that have resulted in declining profits. To stem the slide in profits until new products can be introduced, top management has started to focus on achieving cost savings in manufacturing and increases in sales volume. Sales can be increased only if production volume increases. Therefore, an incentive program has been developed to reward those production managers who contribute to an increase in the number of units produced and achieve cost reductions. In addition, a just-in-time purchasing program has been implemented, and raw materials are purchased on an as-needed basis.The production managers have responded to the pressure to improve manufacturing performance and this has resulted in an increase in the number of completed units over normal production levels. The video game machines are put together by the assembly group, which requires parts from both the…arrow_forwardProfit Corp. has a subunit classified as a cost center that supports other parts of the firm but has reported costs higher than what the corporate office would like to see. Thus, the manager of this subunit is under pressure to cut operating costs without hurting the perceived quality of services provided. What general recommendations could you give to the manager of this cost center to achieve that goal?arrow_forward
- Quality Industries manufactures large workbenches for industrial use. Yewell Hartnet, the Vice President for marketing at Quality Industries, concluded from market analysis that sales were dwindling for Quality's workbenches due to aggressive pricing by competitors. Quality's workbench sells for $1,690 whereas the competition's comparable workbench sells for $1,500. Yewell determined that a price drop to $1,500 would be necessary to protect its market share and maintain an annual sales level of 14,100 workbenches. Cost data based on sales of 14,100 workbenches: Budgeted Quantity Actual Quantity Actual Cost Direct materials (pounds) 180,500 173,500 $ 3,455,500 Direct labor (hours) 75,000 74,250 827,750 Machine setups (no. of setups) 1,450 1,100 255,500 Mechanical assembly (machine hours) 31,150 284,000 3,761,000 If the profit per unit is maintained, the target cost per unit is (rounded to the nearest whole dollar):arrow_forwardJacobs Inc. is a relatively new company that has established a position in the highly competitive biotechnology industry. Which of the following statements is correct regarding Jacobs’ profitability? a. Profits will increase when buyers have lower switching costs. b. Significant up-front capital requirements for new entrants will help Jacobs’ profit margins. c. Profitability is diminished when there are many suppliers. d. Rival firms willing to spend a lot of money on advertising will increase Jacobs’ profitsarrow_forwardThe chief executive officer (CEO) of Cobalt Inc. just read an article written by a business professor at Harvard University describing the benefits of the lean philosophy. The CEO issued the following statement after reading the article: This company will become a lean manufacturing company. Presently, we have too much inventory. To become lean, we need to eliminate the excess inventory. Therefore, I want all employees to begin reducing inventories until we make products “just in time. ” Thank you for your cooperation. How would you respond to the CEO’s statement?arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning