Question

Scanlon plan
Knox Company manufactures consumer products such as cleansers, air fresheners, and detergents. During a recent quarter, the value of the products made was $50,000,000, and the labor costs were $3,000,000. The company has decided to use a Scanlon plan with this quarter being used to establish the base ratio for the plan.

The formula is to be applied quarterly with differences, positive or negative, added to the bonus pool. Differences are calculated as the difference between the base ratio and the actual ratio for each quarter. The pool is to be distributed on a 35%/ 65% basis between the employees and the company at the end of the fourth quarter.

The following production values and cost levels were recorded during the first year of the plan’s operation:

Quarter	Production Value	Payroll Costs
1	$45,000,000	$2,475,000
2	$60,000,000	$3,480,000
3	$55,000,000	$3,575,000
4	$48,000,000	$2,832,000

Required
(a) How much would be distributed to the employees at the end of the year?
Be able to discuss what assumptions the Scanlon plan makes about the behavior of payroll costs.
Note: For each ratio, round your entry to three decimal points. Use this rounded entry in all further calculations.

Quarter	Scanlon Base Ratio	Quarterly Ratio	Plan Change	Cumulative
1	Answer	Answer	Answer	Answer
2	Answer	Answer	Answer	Answer
3	Answer	Answer	Answer	Answer
4	Answer	Answer	Answer	Answer

Therefore the amount available to be distributed to the employees at the end of the year would be $Answer

.

( b) Management proposes to adjust the base ratio using the lowest ratio experienced in any year.

What would be the base ratio under these assumptions?	0.055
If the base ratio continues to decrease what will happen to the overall payout?	AnswerIncreaseDecrease
What is likely to happen to the motivational effect of the plan under these assumptions?	AnswerIncreaseDecrease

Answer 1

(a) How much would be distributed to the employees at the end of the year?
Be able to discuss what assumptions the Scanlon plan makes about the behavior of payroll costs.
Note: For each ratio, round your entry to three decimal points. Use this rounded entry in all further calculations.
Quarter	Scanlon Base Ratio	Quarterly Ratio (Payroll costs/ Production Value)	Plan Change	Cumulative
1	0.06	0.055	$225,000	$225,000
2	0.06	0.058	$120,000	$345,000
3	0.06	0.065	($275,000)	$70,000
4	0.06	0.059	$48,000	$118,000
Therefore the amount available to be distributed to the employees at the end of the year would be  35% x  $118,00	$41,300.00
Working Notes:
Base Ratio = Payroll cost/Value of production = $3,000,000/$50,000,000	0.06
( b) Management proposes to adjust the base ratio using the lowest ratio experienced in any year.
What would be the base ratio under these assumptions?	0.055
If the base ratio continues to decrease what will happen to the overall payout?	Decrease
What is likely to happen to the motivational effect of the plan under these assumptions?	Decrease
Quarter	Scanlon Base Ratio	Quarterly Ratio (Payroll costs/ Production Value)	Plan Change	Cumulative
1	0.055	0.055	$0	$0
2	0.055	0.058	($180,000)	($180,000)
3	0.055	0.065	($550,000)	($730,000)
4	0.055	0.059	($192,000)	($922,000)
Therefore the amount available to be distributed to the employees at the end of the year would be  35% x  $922,000	($322,700.00)

B с D E A 6 The following production values and cost levels were recorded during the first year of the plan's oper 7 Quarter Production Value 8 1 & 1 45000000 92 60000000 102 10 3 55000000 11 4 48000000 12 Required 13 (a) How much would be distributed to the employees at the end of the year? 14 Be able to discuss what assumptions the Scanlon plan makes about the behavior of payroll costs. 15 Note: For each ratio, round your entry to three decimal points. Use this rounded entry in all further ca Payroll Costs 2475000 3480000 3575000 2832000 16 Quarter 17 1 18 2 19 3 20 4 Scanlon Base Ratio =3000000/50000000 =3000000/50000000 =3000000/50000000 =3000000/50000000 Quarterly Ratio (Payroll costs/ Production Value) =C8/B8 =C9/B9 =C10/B10 =C11/B11 Plan Change =B8*(B17-C17) =B9 (B18-C18) =B10*(B19-C19) =B11"(B20-C20) Cumulative =D17 =E17+D18 =E18+D19 =E19+D20 Therefore the amount available to be distributed to the employees at the end of the year would be 21 35% x $118,00 22 Working Notes: =E20*35% =3000000/50000000 23 Base Ratio = Payroll cost/Value of production = $3,000,000/$50,000,000 24 25 (b) Management proposes to adjust the base ratio using the lowest ratio experienced in any year. 26 What would be the base ratio under these assumptions? 0.055 27 If the base ratio continues to decrease what will happen to the overall payout? Decrease Decrease 28 What is likely to happen to the motivational effect of the plan under these assumptions? 29 30 Quarter 31 1 32 2 33 3 34 4 Scanlon Base Ratio 0.055 0.055 0.055 0.055 Quarterly Ratio (Payroll costs/ Production Value) =C17 =C18 =C19 =C20 Plan Change =B8*(B31-C31) =B9*(B32-C32) =B10"(B33-C33) =B11"(B34-C34) Cumulative =D31 =E31+D32 =E32+D33 =E33+D34 Therefore the amount available to be distributed to the employees at the end of the year would be 35 35% x $922,000 =E34*35%