MedLine Equipment Corporation specializes in the manufacture of medical equipment, a field that has become increasingly competitive. Approximately two years ago, Ben Harrington, president of Med-

Line, became concerned that the company’s bonus plan, which focused on division profitability, was not helping MedLine remain competitive. Harrington decided to implement a gain-sharing plan that would encourage employees to focus on operational areas that were important to customers and that added value without increasing cost. In addition to a profitability incentive, the revised plan also includes incentives for reduced rework costs, reduced sales returns, and on-time deliveries. Bonuses are calculated and awarded semiannually on the following basis. The bonuses are distributed among the relevant employees according to a formula developed by the division manager.

• Profitability: Two percent of operating income.

• Rework: Costs in excess of 2 percent of operating income are deducted from the bonus amount.

• On-time delivery: $5,000 if over 98 percent of deliveries are on time, $2,000 if 96 to 98 percent of deliveries are on time, and no increment if on-time deliveries are below 96 percent.

• Sales returns: $3,000 if returns are less than 1.5 percent of sales. Fifty percent of any amount in excess of 1.5 percent of sales is deducted from the bonus amount.

• Note: If the calculation of the bonus results in a negative amount for a particular period, there is no bonus, and the negative amount is not carried forward to the next period.

The revised bonus plan was implemented on January 1, 20x1. Presented in the following table are the results for two of Medline’s divisions, Charter and Mesa Divisions, for the first year under the new bonus plan. Both of these divisions had similar sales and operating income results for the prior year, when the old bonus plan was in effect. Based on the 20x0 results, the employees of the Charter Division earned a bonus of $27,060 while the employees of the Mesa Division earned $22,440.

Required:
1. For the Charter Division:

a. Compute the semiannual installments and total bonus awarded for 20x1.

b. Discuss the likely behavior of the Charter Division employees under the revised bonus plan.
2. For the Mesa Division:

a. Compute the semiannual installments and total bonus awarded for 20x1.

b. Discuss the likely behavior of the Mesa Division employees under the revised bonus plan.
3. Citing specific examples, evaluate whether or not Harrington’s revisions to the bonus plan at Med-
Line Equipment Corporation have achieved the desired results, and recommend any changes that might improve the plan.

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Sales Operating income On-time delivery Rework costs Sales returns Charter Division January 20x1- June 20x1 July 20x1- December 20x1 June 20x1 $4,200,000 $4,400,000 $2,850,000 $462,000 $440,000 $342,000 Mesa Division January 20x1- July 20x1- December 20x1 $2,900,000 $406,000 95.4% 97.3% 98.2% 94.6% $11,500 $11,000 $6,000 $8,000 $ 84,000 $70,000 $44,750 $42,500