Financial and non-financial performance measures, goal congruence. (CMA, adapted) Summit Equipment specializes in the manufacture of medical equipment, a field that has become increasingly competitive. Approximately two years ago, Ben Harrington, president of Summit, decided to revise the bonus plan (based, at the time, entirely on operating income) to encourage division managers to focus on areas that were important to customers and that added value without increasing cost. In addition to a profitability incentive, the revised plan includes incentives for reduced rework costs, reduced sales returns, and on-time deliveries. Bonuses are calculated and awarded semiannually on the following basis: A base bonus is calculated at 2% of operating income; this amount is then adjusted as follows:

a. (i)     Reduced by excess of rework costs over and above 2% of operating income

 (ii)     No adjustment if rework costs are less than or equal to 2% of operating income

b. (i)     Increased by $5,000 if more than 98% of deliveries are on time, and by $2,000 if 96% to 98% of deliveries are on time

 (ii)     No adjustment if on-time deliveries are below 96%

c. (i)     Increased by $3,000 if sales returns are less than or equal to 1.5% of sales

 (ii)     Decreased by 50% of excess of sales returns over 1.5% of sales

If the calculation of the bonus results in a negative amount for a particular period, the manager simply receives no bonus, and the negative amount is not carried forward to the next period. Results for Summit’s Charter Division and Mesa Division for 2009, the first year under the new bonus plan, follow. In 2008, under the old bonus plan, the Charter Division manager earned a bonus of $27,060 and the Mesa Division manager, a bonus of $22,440.

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Charter Division July 1, 2009 to Dec. 31, 2009 Mesa Division January 1, 2009 to June 30, 2009 July 1, 2009 to Dec. 31, 2009 January 1, 2009 to June 30, 2009 $2,850,000 Revenues $4,200,000 $4,400,000 $2,900,000 $ 462,000 $ 440,000 $ 342,000 Operating income $ 406,000 On-time delivery 95.4% 97.3% 98.2% 94.6% 11,500 11,000 Rework costs 6,000 $ 44,750 8,000 $ 84,000 $ 70,000 $ 42,500 Sales returns