Potter Company manufactures two models of exercise bikes – the ST100 and the EX5

Question

Potter Company manufactures two models of exercise bikes – the ST100 and the EX500. The current cost accounting system allocates manufacturing support costs to the two products on the basis of direct labor hours. For 2016, the company has estimated that it will incur $1,017,000 in manufacturing support costs, work 60,000 direct labor hours, and produce 10,000 units of the EX500 model and 40,000 units of the ST100 model. The EX500 model requires two hours of direct labor to assemble and the ST100 requires one hour of direct labor to assemble. Material and labor costs per unit and the selling price per unit are as follows:

                                                    ST100           EX500

                Direct material              $32                 $45

                Direct Labor 10                   20

                Selling Price 90                 150

The company recently implemented an incentive of $10 for every EX500 unit sold. What is your evaluation of the desirability of this new incentive?

Explanation / Answer

Incentives plans are the tools that are used by the company to encourage their employees, recognize and to provide an exceptional performance in their employees.

Some of the examples that are associated with providing incentives are:

1. Motivation among the employees to achieve higher goals.

2. Basically the incentives plans are tied to earnings, the more revenue an employee generates for a business, the more he is rewarded.

Here are some of the potential pitfalls to using a incentive program:

1. Providing incentives to the employees creates extra cost burden to the company.

2. It takes time and effort to set up.

3. Can create frustration if there are perceptions of unequal contribution among group members.

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