MA17-35. Assessing the Impact of an Incentive Plan

a. Suppose the goal of the firm is to now provide superior customer service by having the sales consultant identify and sell to the specific needs of the customer. What does this goal suggest about a change in managerial accounting and control systems?

b. Provide an estimate of the impact of the incentive plan on sales.

c. Did the sales impact occur all at once, or did it occur gradually?

d. What is the impact of the incentive plan on wage expense as a percent of sales?

e. What is the impact of the incentive plan on cost of good sold as a percent of sales?

f. What is the impact of incentive plan on inventory turnover (turnover = cost of goods sold inventory)? [If sales go up then stores are selling more goods; therefore, more goods need to be on the floor or those goods on floor need to turn over faster.]

g. What is the additional dollar amount of inventory that must be held?

h. Using the information on sales and expenses for a typical store, provide an analysis of the additional store profit contributed by the plan. Assume that it costs 12% a year to carry the added inventory.

i. Look at Exhibit 1, which provides a partial listing of employee pay for one small department within a store. Which type of employee is receiving the bonus?

j. Should the company keep the plan? Explain your estimate of the financial impact of the plan and also incorporate any nonfinancial information you feel is relevant in justifying your decision

Module 17 Relevant Costs and Benefits for Decision Making are reported in Figure 1 page 17-36. Month 25 is denoted as the rollout month, the month the incen- tive plan began. Expense Analysis: You then plotted wage expense/sales, cost of goods sold/sales, and inventory turnover for the twenty stores for the 24 months preceding the plan and the first 24 months after plan implementation. After pulling out seasonal effects these monthly series are presented in Figures 2, 3 and 4. If the plan has no impact on these expenses then you would expect no dramatic change in the series around month 25. Figure 2 plots (wage expense in month t/sales in month t) Figure 3 plots (cost of goods sold in month t/sales in month t) Figure 4 plots annual" turnover computed as (12 x cost of goods sold in month t/inventory at beginning of month t) For example, if monthly cost of sales is $100 and the annual inventory turnover ratio is 4, it suggests a monthly turnover of 0.333 with the firm holding an average inventory of $300 throughout the year. (Note that a monthly inventory turnover of .333 implies an annual turnover of 4 (from 12 x 0.333). Financial Report for Store: A typical annual income statement for a pre-plan Ladbreck store before fixed charges, taxes and incidentals looks as follows. Total Percent 100 ..... ....... Sales......... Cost of goods sold .... Gross profit. Employee salaries........ Profit before fixed charges.... 10,000,000 6,300,000 3,700,000 800,000 2,900,000 A store also has substantial charges for rent, management salaries, insurance, etc. but they are fixed with respect to the incentive plan. Exhibit 1 Wages by subset of employees in Ladbreck's fashion department Actual Sales Total Hourly Years of Wage Service Rate Hours Worked in Quarter for Pay Regular Pay Name Quarter Bonus Quarter 2 400 400 440 440 400 400 400 440 DO BOB MARLEY JIMI HENDRIX.. MILLIE SMALL... AL GREEN.......... BOB DYLAN. JANIS JOPLIN .. WILSON PICKETT... BRUCE SPRINGSTEEN. ....... MICHIGAN & SMILEY RICHIE FURAY.. JOHN LENNON.. JULIO IGLESIAS. TOMMY PETTY JOAN BAEZ .......... BB KING .. GLADYS KNIGHT.... NEIL YOUNG BO DIDDLEY.. 240 4.00 7.50 9.99 6.00 5.00 6.00 7.50 9.99 7.00 9.90 5.00 5.00 6.00 9.90 6.00 8.00 8.00 5.00 440 400 400 1,600 3,300 4,396 2,400 2,000 2,400 3,300 4,396 2,800 3,960 2,000 2,400 2,400 3,960 2,400 3,840 3,840 2,000 25,000 41,000 40,000 36,000 30,000 30,000 50,000 30,000 38,000 30,000 34,000 46,000 36,000 40,000 38,000 46,000 36,000 30,000 2,000 3,300 4,396 2,880 2,400 2,400 4,000 4,396 3,040 3,960 2,720 3,680 2,880 3,960 3,040 3,840 3,840 2,400 400 720 480 400 480 400 400 480 480 400 Figure 1 Percentage Change in Sales Figure 3 Cost of Goods Sold as a Percent of Sales Percent change o- 5 T -12 TTTTTTIIIIIIIIIIIIIIIII 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 Month (rollout month-25) I IIIIITIT 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 Month (rollout month-25) Figure 2 Wage Expense as a Percent of Sales Figure 4 Inventory Turnover HAHA Percent 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 Month (rollout month-25) OTTTTTTTTTTTTTTTTTTTTI 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 Month (rollout month-25) Module 17 Relevant Costs and Benefits for Decision Making are reported in Figure 1 page 17-36. Month 25 is denoted as the rollout month, the month the incen- tive plan began. Expense Analysis: You then plotted wage expense/sales, cost of goods sold/sales, and inventory turnover for the twenty stores for the 24 months preceding the plan and the first 24 months after plan implementation. After pulling out seasonal effects these monthly series are presented in Figures 2, 3 and 4. If the plan has no impact on these expenses then you would expect no dramatic change in the series around month 25. Figure 2 plots (wage expense in month t/sales in month t) Figure 3 plots (cost of goods sold in month t/sales in month t) Figure 4 plots annual" turnover computed as (12 x cost of goods sold in month t/inventory at beginning of month t) For example, if monthly cost of sales is $100 and the annual inventory turnover ratio is 4, it suggests a monthly turnover of 0.333 with the firm holding an average inventory of $300 throughout the year. (Note that a monthly inventory turnover of .333 implies an annual turnover of 4 (from 12 x 0.333). Financial Report for Store: A typical annual income statement for a pre-plan Ladbreck store before fixed charges, taxes and incidentals looks as follows. Total Percent 100 ..... ....... Sales......... Cost of goods sold .... Gross profit. Employee salaries........ Profit before fixed charges.... 10,000,000 6,300,000 3,700,000 800,000 2,900,000 A store also has substantial charges for rent, management salaries, insurance, etc. but they are fixed with respect to the incentive plan. Exhibit 1 Wages by subset of employees in Ladbreck's fashion department Actual Sales Total Hourly Years of Wage Service Rate Hours Worked in Quarter for Pay Regular Pay Name Quarter Bonus Quarter 2 400 400 440 440 400 400 400 440 DO BOB MARLEY JIMI HENDRIX.. MILLIE SMALL... AL GREEN.......... BOB DYLAN. JANIS JOPLIN .. WILSON PICKETT... BRUCE SPRINGSTEEN. ....... MICHIGAN & SMILEY RICHIE FURAY.. JOHN LENNON.. JULIO IGLESIAS. TOMMY PETTY JOAN BAEZ .......... BB KING .. GLADYS KNIGHT.... NEIL YOUNG BO DIDDLEY.. 240 4.00 7.50 9.99 6.00 5.00 6.00 7.50 9.99 7.00 9.90 5.00 5.00 6.00 9.90 6.00 8.00 8.00 5.00 440 400 400 1,600 3,300 4,396 2,400 2,000 2,400 3,300 4,396 2,800 3,960 2,000 2,400 2,400 3,960 2,400 3,840 3,840 2,000 25,000 41,000 40,000 36,000 30,000 30,000 50,000 30,000 38,000 30,000 34,000 46,000 36,000 40,000 38,000 46,000 36,000 30,000 2,000 3,300 4,396 2,880 2,400 2,400 4,000 4,396 3,040 3,960 2,720 3,680 2,880 3,960 3,040 3,840 3,840 2,400 400 720 480 400 480 400 400 480 480 400 Figure 1 Percentage Change in Sales Figure 3 Cost of Goods Sold as a Percent of Sales Percent change o- 5 T -12 TTTTTTIIIIIIIIIIIIIIIII 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 Month (rollout month-25) I IIIIITIT 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 Month (rollout month-25) Figure 2 Wage Expense as a Percent of Sales Figure 4 Inventory Turnover HAHA Percent 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 Month (rollout month-25) OTTTTTTTTTTTTTTTTTTTTI 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 Month (rollout month-25)