Problem 12-51 Operational Performance Measures; Incentives; Cost Reduction (Appendix) (LO 12-8) 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: $19,500 per employee if over 98 percent of deliveries are on time, $13,500 if 96 to 98 percent of deliveries are on time, and no increment if on-time deliveries are below 96 percent Sales returns $11,700 per employee if returns are less than 15 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 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, 201. Presented in the following table are the results for two of Medine's divisions, Charter and Mesa Divisions, for the first year under the new bonus plan. Both of these divisions The revised incentive 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 an incentive bonus of $63,620 while the employees of the Mesa Division earned $62,405. Sales Operating income On-time delivery Rework costs Sales returns Charter Division January 20x1- July 20x1- June 20xd December 2exi $9,350, eee $9,750,000 $1,028,500 $ 975,000 95.4% 97.8% $ 28,700 $ 27,700 $ 171,800 $ 159,000 Mesa Division January 20x1- July 2exi- June 20x1 December 20x1 $6,650, eee $6,750,000 $ 798,000 $ 945,000 99.3% 95.1% $ 15,800 $ 18.400 $ 108,5ee $ 94, see Required: 1. For the Charter Division: a. Compute the semiannual installments and total incentive bonus awarded for 20x1. 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 20x1. 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? Complete this question by entering your answers in the tabs below. Required 3B Required 3C Required 1A Required 1B Required 2A Required 2B Required 3A Compute the Charter Division semiannual installments and total incentive bonus awarded for 20x1. First semiannual bonus awarded Second semiannual bonus awarded Total bonus awarded for the year Required 1A Required 1B > Required 1A Required 1B Required 2A Required 2B Required 3A Required 36 Required 3C After the implementation of the revised bonus plan, what would be the likely behavior of the employees of the Charter Division? The employees of the Charter Division are likely to be Required 1A Required 18 Required 2A Required 28 Required 3A Required 38 Required 30 Compute the Mesa Division semiannual installments and total incentive bonus awarded for 20x1. First semiannual bonus awarded Second semiannual bonus awarded Total bonus awarded for the year Required 1A Required 1B Required 2A Required 2B Required 3A Required 3B Required 3C After the implementation of the revised bonus plan, what would be the likely behavior of the employees of the Mesa Division? The employees of the Mesa Division are likely to be Required 1A Required 18 Required 2A Required 28 Required 3A Required 3B Required 3C What effects did Harrington's revised incentive bonus plan have on the Charter Division? (Select "Yes" if the statement had an effect on Charter division, and "No" if it does not have an effect.) Decreased rework costs. Increased the operating income. Increased on-time deliveries Increased rework costs Docreased sales retums. Decreased on-time deliveries Increased sales returns. Decreased the operating income Required 1A Required 18 Required 2A Required 2B Required 3A Required 3B Required 3C What effects did Harrington's revised incentive bonus plan have on the Mesa Division? (Select "Yes" if the statement had an effect on Mesa division, and "No" if it does not have an effect.) Increased the operating income. Decreased on-time deliveries Decreased sales returns Decreased the operating incomo. Increased sales retums. Increased on-time deliveries Decreased rework costs Increased rework costs. Required 1A Required 1B Required 2A Required 2B Required 3A Required 3B Required 30 What changes would you recommend that might improve the revised incentive bonus plan? (Select "Yes" if the change will improve the revised incentive bonus plan, and "No" if it will not improve.) Develop benchmarks to encourage continuous improvement. Create a reward structure for costs that have a low percentage of operating income to drive costs lower. Continue the semiannual calculation Required 1A Required 1B Required 2A Required 2B Required 3A Required 36 Required 3C After the implementation of the revised bonus plan, what would be the likely behavior of the employees of the Charter Division? The employees of the Charter Division are likely to be Required 1A Required 18 Required 2A Required 28 Required 3A Required 38 Required 30 Compute the Mesa Division semiannual installments and total incentive bonus awarded for 20x1. First semiannual bonus awarded Second semiannual bonus awarded Total bonus awarded for the year Required 1A Required 1B Required 2A Required 2B Required 3A Required 3B Required 3C After the implementation of the revised bonus plan, what would be the likely behavior of the employees of the Mesa Division? The employees of the Mesa Division are likely to be Required 1A Required 18 Required 2A Required 28 Required 3A Required 3B Required 3C What effects did Harrington's revised incentive bonus plan have on the Charter Division? (Select "Yes" if the statement had an effect on Charter division, and "No" if it does not have an effect.) Decreased rework costs. Increased the operating income. Increased on-time deliveries Increased rework costs Docreased sales retums. Decreased on-time deliveries Increased sales returns. Decreased the operating income Required 1A Required 18 Required 2A Required 2B Required 3A Required 3B Required 3C What effects did Harrington's revised incentive bonus plan have on the Mesa Division? (Select "Yes" if the statement had an effect on Mesa division, and "No" if it does not have an effect.) Increased the operating income. Decreased on-time deliveries Decreased sales returns Decreased the operating incomo. Increased sales retums. Increased on-time deliveries Decreased rework costs Increased rework costs. Required 1A Required 1B Required 2A Required 2B Required 3A Required 3B Required 30 What changes would you recommend that might improve the revised incentive bonus plan? (Select "Yes" if the change will improve the revised incentive bonus plan, and "No" if it will not improve.) Develop benchmarks to encourage continuous improvement. Create a reward structure for costs that have a low percentage of operating income to drive costs lower. Continue the semiannual calculation