that would enhance customer service. Sales associates were now expected to build a client use 10 Ladbrecks is a major department store with 50 retail outlets. The company's stores com the early nineties the company decided that providing excellent customer service was the key outlets run by companies such as Nordstrom. Macy's, Bloomingdales, and Saks Fifth Avenue cnt for success in the retail industry. Therefore, during the mid 1990s the company the plan and to provide a recommendation to management to continue or discontinue the plate incentive plan for its sales associates in 20 of its stores. Your job is to assess the financial to improve performance. A recent New York Times article reported that more and more The past decade has evidenced a concerted effort by many firms to empower and motivatory fering bonus plans to hourly workers. An Ernst and Young survey of the retail industry West virtually all department stores currently offer incentive programs such as straight salary plus commission, and quota bonus programs. Although these programs can add to pay the survey respondents indicated that they believe these plans have contributed to major Ladbrecks was founded by members of the Ladbreck family in the 1880s. The first store opere under the name Ladbreck Dry Goods. Growth was fueled through acquisitions as the industry solidated during the 1960s. Over this hundred-year period, sales associates were paid a fixed body agement expected that the new incentive scheme would motivate many changes in employee belevior as a major change for the firm and its sales for Me Overview on your findings. Incentives in Retail ments in customer service. Company's Background wage. Raises were based on seniority, Sales associates were expected to be neat and countcowy customers. The advent of specialty stores and the stated intention of an upscale west coast retailer begin opening stores in the Midwest concerned Ladbreck's management Building on its history of excellence in customer service, the company initiated its performance-based incentive plan to seppen its stated firm-wide strategy of "customer emphasis with "employee empowerment." Management expected it to result in further enhancement of customer service and consequently, in an increase in sales generated at its stores. Incentive Plan The plan was implemented in stores sequentially as company managers intended to examine and evaluate the plan's impact on sales and profitability. Initially, the firm selected one store from a group of similar stores in the same general area to begin the implementation. By the end of 1994, 10 stores had implemented the plan. In 1995. 10 more stores implemented the plan, bringing the total to cel of a total of 50. The performance-based incentive plan is best described as a bonus program. At the time el the plan's implementation, sales associates received little in the form of annual merit increases, and promotions were rare. The bonus payment became the only significant reward for high performance Each week sales associates are paid a base hourly rate times hours worked. In addition, under the plan sales associates could increase their compensation by receiving a bonus at the end of each quarter The contract provides sales-force personnel with a cash bonus only if the actual quarterly sales et erated by the employee exceed a quarterly sales goal. Individualized pre-specified sales goals were multiplier (multiplier = 1/bonus rute). The bonus is computed as a fixed percentage of the excess (actual sales minus a pre-specified sales goal) by the employee in a quarter (sce Exhibit 1) Employee's Bonus 0.08 (Employee's actual sales for quarter - employee's targeted sales for quarter) Where employee's Employee's targeted sales for quarter Hours worked in quarter Senior managers regarded the incentive plan X X hourly wage car Module 17 Heart Costs and Benefits for Decision Making 17.94 generate repeat sales. Actions consistent with this approach include developing and updating customer address lists including details of their needs and preferences, writing thank you, and contacting customers about upcoming sales and new merchandise that ched the preference Consultant's Task Stanagement decided to call you in to provide an independentement. While the company w hot sales had increased with the plan's implementation, the human resources department did not know exactly how to quantify the plun' impact on sales and expenses. It suspected that employee salaries, cost of goods sold and inventory carrying costs, welt alates may have changed due to the plan's implementation. You therefore, requested information on these financial variables Sales Analyse: Became each of the 20 stores implemented the plan at different dates, and store le noctuated greatly with the seasons and the economy, you could not simply plot store sales Intead for each of the 20 stores, you picked another Ladhreck store as a control and computed for 48 month the following series of monthly sale Percent Change in Sales Pan Store Sales in Montht Plan Stone Sales in Month-24) - (Control Store Sales in MonthControl Store Sales in Month-24) 100 The plan's implementation was denoted as month 25, so you had 24 months prior to the plan and 24 months after the plan. Averages were then taken for the 20 stores. If the control procedure worked then you expected that the first 24 months of the series would fluctuate around zero. The actual re sults are reported in Figure 1. page 17.37, Month 25 is denoted as the rollout month, the mouth the incentive plan began. Expense Analysis: You then plotted wage expense/sales, cost of goods sold/sales, and inventory tumover for the 20 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 Usales in montht) Figure 3 plots (cost of goods sold in month t/sales in month) Figure 4 plots "annual turnover computed as (12 x cost of goods sold in monthtinventory at beginning of month) For example, if monthly cost of sales is 5100 and the annual inventory turnover ratio is 4. it suggests a monthly turnover of 0.333 with the fimm 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 Ladhreck store before fixed charges, taxes, and incidentals looks as follows. Total Percent 100 10,000,000 6,300,000 3,700,000 800,000 2.900.000 Sales. Cost of goods sold Gross profil Employee salaries Profit before fixed charges 63 37 8 29 A store also has substantial charges for rent management salaries, insurance, etc., but they are fixed with respect to the incentive plan. Required 4. Suppose the goal of the firm is to now provide superior customer service by having the sales con- sultant identify and sell to the specific needs of the customer. What does this goal suggest about a change in managerial accounting and control systems? Provide an estimate of the impact of the incentive plan on sales Did the sales impact occur all at once, or did it occur gradually? myn. Alt sales in the control or we that would enhance customer service. Sales associates were now expected to build a client use 10 Ladbrecks is a major department store with 50 retail outlets. The company's stores com the early nineties the company decided that providing excellent customer service was the key outlets run by companies such as Nordstrom. Macy's, Bloomingdales, and Saks Fifth Avenue cnt for success in the retail industry. Therefore, during the mid 1990s the company the plan and to provide a recommendation to management to continue or discontinue the plate incentive plan for its sales associates in 20 of its stores. Your job is to assess the financial to improve performance. A recent New York Times article reported that more and more The past decade has evidenced a concerted effort by many firms to empower and motivatory fering bonus plans to hourly workers. An Ernst and Young survey of the retail industry West virtually all department stores currently offer incentive programs such as straight salary plus commission, and quota bonus programs. Although these programs can add to pay the survey respondents indicated that they believe these plans have contributed to major Ladbrecks was founded by members of the Ladbreck family in the 1880s. The first store opere under the name Ladbreck Dry Goods. Growth was fueled through acquisitions as the industry solidated during the 1960s. Over this hundred-year period, sales associates were paid a fixed body agement expected that the new incentive scheme would motivate many changes in employee belevior as a major change for the firm and its sales for Me Overview on your findings. Incentives in Retail ments in customer service. Company's Background wage. Raises were based on seniority, Sales associates were expected to be neat and countcowy customers. The advent of specialty stores and the stated intention of an upscale west coast retailer begin opening stores in the Midwest concerned Ladbreck's management Building on its history of excellence in customer service, the company initiated its performance-based incentive plan to seppen its stated firm-wide strategy of "customer emphasis with "employee empowerment." Management expected it to result in further enhancement of customer service and consequently, in an increase in sales generated at its stores. Incentive Plan The plan was implemented in stores sequentially as company managers intended to examine and evaluate the plan's impact on sales and profitability. Initially, the firm selected one store from a group of similar stores in the same general area to begin the implementation. By the end of 1994, 10 stores had implemented the plan. In 1995. 10 more stores implemented the plan, bringing the total to cel of a total of 50. The performance-based incentive plan is best described as a bonus program. At the time el the plan's implementation, sales associates received little in the form of annual merit increases, and promotions were rare. The bonus payment became the only significant reward for high performance Each week sales associates are paid a base hourly rate times hours worked. In addition, under the plan sales associates could increase their compensation by receiving a bonus at the end of each quarter The contract provides sales-force personnel with a cash bonus only if the actual quarterly sales et erated by the employee exceed a quarterly sales goal. Individualized pre-specified sales goals were multiplier (multiplier = 1/bonus rute). The bonus is computed as a fixed percentage of the excess (actual sales minus a pre-specified sales goal) by the employee in a quarter (sce Exhibit 1) Employee's Bonus 0.08 (Employee's actual sales for quarter - employee's targeted sales for quarter) Where employee's Employee's targeted sales for quarter Hours worked in quarter Senior managers regarded the incentive plan X X hourly wage car Module 17 Heart Costs and Benefits for Decision Making 17.94 generate repeat sales. Actions consistent with this approach include developing and updating customer address lists including details of their needs and preferences, writing thank you, and contacting customers about upcoming sales and new merchandise that ched the preference Consultant's Task Stanagement decided to call you in to provide an independentement. While the company w hot sales had increased with the plan's implementation, the human resources department did not know exactly how to quantify the plun' impact on sales and expenses. It suspected that employee salaries, cost of goods sold and inventory carrying costs, welt alates may have changed due to the plan's implementation. You therefore, requested information on these financial variables Sales Analyse: Became each of the 20 stores implemented the plan at different dates, and store le noctuated greatly with the seasons and the economy, you could not simply plot store sales Intead for each of the 20 stores, you picked another Ladhreck store as a control and computed for 48 month the following series of monthly sale Percent Change in Sales Pan Store Sales in Montht Plan Stone Sales in Month-24) - (Control Store Sales in MonthControl Store Sales in Month-24) 100 The plan's implementation was denoted as month 25, so you had 24 months prior to the plan and 24 months after the plan. Averages were then taken for the 20 stores. If the control procedure worked then you expected that the first 24 months of the series would fluctuate around zero. The actual re sults are reported in Figure 1. page 17.37, Month 25 is denoted as the rollout month, the mouth the incentive plan began. Expense Analysis: You then plotted wage expense/sales, cost of goods sold/sales, and inventory tumover for the 20 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 Usales in montht) Figure 3 plots (cost of goods sold in month t/sales in month) Figure 4 plots "annual turnover computed as (12 x cost of goods sold in monthtinventory at beginning of month) For example, if monthly cost of sales is 5100 and the annual inventory turnover ratio is 4. it suggests a monthly turnover of 0.333 with the fimm 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 Ladhreck store before fixed charges, taxes, and incidentals looks as follows. Total Percent 100 10,000,000 6,300,000 3,700,000 800,000 2.900.000 Sales. Cost of goods sold Gross profil Employee salaries Profit before fixed charges 63 37 8 29 A store also has substantial charges for rent management salaries, insurance, etc., but they are fixed with respect to the incentive plan. Required 4. Suppose the goal of the firm is to now provide superior customer service by having the sales con- sultant identify and sell to the specific needs of the customer. What does this goal suggest about a change in managerial accounting and control systems? Provide an estimate of the impact of the incentive plan on sales Did the sales impact occur all at once, or did it occur gradually? myn. Alt sales in the control or we