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 MedLine, became concerned that the company$$s bonus plan, which focused on division profitability, was not helping MedLine remain competitive. Harrington decided to implement a plan that would encourage employees to focus on operational areas that were important to customers and that added value without increasing cost. To provide an incentive to employees to contribute ideas, a share of company profits would be awarded to employees, and there would be additional financial incentives for reduced rework costs, reduced sales returns, and on$-$time deliveries. Incentive bonuses, which would be distributed among the relevant employees according to a formula developed by the division manager, would be calculated and awarded semiannually on the following basis.

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: $$20,000$ per employee if over $98$ percent of deliveries are on time, $$14,000$ if $96$ to $98$ percent of deliveries are on time, and no increment if on$-$time deliveries are below $96$ percent.

Sales returns: $$12,000$ per employee if returns are less than $1\mathrm{.}5$ percent of sales. Fifty percent of any amount in excess of $1\mathrm{.}5$ percent of sales is deducted from the bonus amount.

Note: If the calculation of the incentive 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 incentive bonus plan was implemented on January $1,20$x$1.$ Presented in the following table are the results for two of Medline$$s divisions, Charter and Mesa Divisions, for the first year under the new bonus plan. Both of these divisions had similar sales and operating income results for the prior year, when the old bonus plan was in effect. Based on the $20$x$0$ results, the employees of the Charter Division earned an incentive bonus of $$64,120$ while the employees of the Mesa Division earned $$63,390.$

Charter Division Mesa Division

January $20$x$1$ July $20$x$1$ January $20$x$1$ July $20$x$1$

June $20$x$1$ December $20$x$1$ June $20$x$1$ December $20$x$1$

Sales $ $9,400,000$ $ $9,800,000$ $ $6,700,000$ $ $6,800,000$

Operating income $ $1,034,000$ $ $980,000$ $ $804,000$ $ $952,000$

On$-$time delivery $95\mathrm{.}5\%97\mathrm{.}9\%99\mathrm{.}4\%95\mathrm{.}2\%$

Rework costs $ $29,000$ $ $28,000$ $ $16,000$ $ $18,500$

Sales returns $ $172,000$ $ $160,000$ $ $109,500$ $ $95,000$

Required:

$1.$ For the Charter Division:

a$.$ Compute the semiannual installments and total incentive bonus awarded for $20$x$1.$

b$.$ After the implementation of the revised bonus plan, what would be the likely behavior of the employees of the Charter Division?

$2.$ For the Mesa Division:

a$.$ Compute the semiannual installments and total incentive bonus awarded for $20$x$1.$

b$.$ After the implementation of the revised bonus plan, what would be the likely behavior of the employees of the Mesa Division?

$3-$a$.$ What effects did Harrington's revised incentive bonus plan have on the Charter Division?

$3-$b$.$ What effects did Harrington's revised incentive bonus plan have on the Mesa Division?

$3-$c$.$ What changes would you recommend that might improve the revised incentive bonus plan?