Sisters Inc.

We are in 2019. Sisters Inc., is now a worldwide pet food conglomerate, run by two sisters, Big Sister, the CEO, and Little Sister, the President. As a result of a massive we are the 100% minus 1% strike, that attracted national media attention, the company started negotiating a new union agreement with its employee union, Pets R. US effective January 1, 2019, and as the new union representative, Guy W.G. Shepherd is responsible for determining how the agreement will impact the companys overhead, especially its defined benefit pension plan.

Moreover, Guy needs to decide if the agreement is fair and whether Sisters Inc. is not lowballing and can really afford to provide a higher pension expense to its employees and avoid future labor strikes.

As a threshold for lowballing, the union agreed that pension expense should be at least 1% of Sisters budgeted net income for 2020, based on what other pension plans are offering and the theme of the last labor strike. Therefore, if the pension expense is greater than 1% of budgeted net income, Guy W.G. Shepherd is prepared to accept Sisters proposal on behalf of Pets R Us. If it is less than 1%, its back to the drawing board for further negotiations.

At first, Sisters Inc. wanted to delay the negotiations and give W.G. Shepherd some pumpkin and chicken (his favorite meal) and even offered to invite him to his favorite ball game, but W.G. Shepherd refused since he didnt want that to influence his decision-making ability as a steward and representative of the union.

After a late night of negotiations Sisters CEO Big Sister finally gave W.G. Shepherd something real to chew on. Sisters Inc. proposed a new defined pension plan called the Meow Max Plan that creates a defined benefit plan for employees who are expected to retire in six years at the end of 2025 since those were the employees who were most active in the recent strike.

Mew Max Pension Plan Details and Assumptions		Employee Details
Discount rate	5.50%	Start of Plan	1 Jan. 2019
Pension Plan Benefit Payments		Expected retirement date	31 Dec. 2025
Annual payments are paid at year end and continue for 30 years, 100 employees are expected to retire in 2025. At this time, Sisters Inc. has made no plans to provide any contributions to the plan, but may decide to do so in a few years.		Average Salary from last 5 years:	$50,000
		Estimated years in retirement	30

Budgeted Net Income for 2020: $150 million

Benefit Formula: Average of Last 5 Years Salary Number of Years of Service 0.025

1- What is the interest cost at the end of 2020? (1 point)

1. $50,000
2. $76,450
3. $85,961
4. $91,740

2- What is pension expense at the end of 2020? (1 point)

1. 1,390,000
2. 1,466,500
3. 1,543,060
4. 1,545,625

3- What is the projected benefit obligation at the end of 2020? (1 point)

1. 1,390,000
2. 1,543,060
3. 2,856,500
4. 2,933,060

4- Should W.G. Shepherd accept Big Sisters proposal? (1 point)

1. Yes
2. No