Incentive Wage Plan. Memorizon Electronics Company, a relatively small supplier of computer-oriented parts, is currently engaged in producing a new component for the computer sensory unit.
The company has been producing 150 units per week; fixed factory overhead was estimated to be $600 per week. The following is a schedule of the pay rates of three workers properly classified as direct labor:
Employee
Clancy, D . Luken, T . Schott, J .
Hourly Rate
$3.00
4.00
3.50
Customers have been calling in for additional units, but management does not want to work more than 40 hours per week. In order to motivate its workers to produce more, the company decided to institute an incentive wage plan. The following schedule describes the plan formulated and started on a trial basis:
Employee
Base Rate Incentive Premium
Clancy, D . Luken, T. . Schott, J ” .
$1. 75
2.75
2.25
$ . 50 per unit
$.50 per unit
$.50 per unit
The first week the plan was put into operation production increased to 165 units. The shop superintendent studied the results and believed the plan too costly; production had increased 10%, but labor costs had increased by approxi- mately 23.2%. He requested permission to redesign the plan to make the labor cost increases proportionate to the productivity increase.
Required: (1) The approximate dollar value of the 23.2% labor cost increase. (2) An opinion, supported by figures, as to whether the shop superintendent
was correct in assuming that the incentive wage plan was too costly. Discuss other factor(s) to be considered.
