Peterborough Medical Devices makes devices and equipment that it sells to hospitals. The organization has a profit-sharing plan that is worded as follows:
The company will make available a profit-sharing pool that will be the lower of the following two items:
1. 40% of income before taxes in excess of the target profit level, which is 18% of net assets, or 2. $7 million.
The individual employee is paid a share of the profit-sharing pool equal to the ratio of that employee’s salary to the total salary paid to all employees.
Required
(a) If the company earned $45 million of earnings before taxes and had net assets of $100 million, what would be the amount available for distribution from the profit-sharing pool?
(b) Suppose that Marg Watson’s salary was $68,000 and that total salaries paid in the company were $25 million. What would Marg’s profit share be?
(c) What do you like about this profit-sharing plan?
(d) What do you dislike about this profit-sharing plan?