Chapter 2: Should We Hire Workers or Pay Overtime? Or a combination of both? You

Question

Chapter 2: Should We Hire Workers or Pay Overtime? Or a combination of both? You decide.

As you may recall, the Fair Labor Standards Act requires employers to pay non-exempt status employees an overtime rate at least equal to 1.5 times the normal hourly wage for each hour worked beyond the 40-hour workweek.

Because of a new big client in BEST ENTERPRISES, you must increase company manufacturing output by 10% to meet the contract demands.

The executive team has asked you to figure out if BEST ENTERPRISES SHOULD:

Hire 100 new employee, which would be 10% more employees than currently on board ** OR**

Pay the current 1000 employees 10% overtime each week (equals 4 additional hours per week per worker ** OR **

Pay half the workers (500) overtime and then hire only 50 new employees instead of the original 100)

YOUR JOB IS TO CALCULATE WHAT EACH OPTION WOULD COST AND THEN MAKE A RECOMMENDATION TO THE EXECUTIVE TEAM.

Option 1 is to pay the current employees overtime

Scenario: Each of the 1,000 manufacturing employees earns $20 per hour. Because manufacting output will increase by 10%, each employee would have to work an additional 4 hours per week (40 hours per week times 10% overtime). For each of these additional 4 hours, each employee would earn $30 per hour (this is regular salary of $20 times 1.5 overtime).

Calculate the total weekly wages for ONE EMPLOYEE if he/she works 44 hours.

_________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Calculate the yearly wages for ONE EMPLOYEE if he/she works 52 weeks @44 hours per week. ______________________________________________________________________________________________________________________________________________________

Calculate the total payroll that would be needed to cover 1,000 employees working 44 hours per week (use answer from b. and multiply by 1,000) ______________________________________________________________________________________________________________________________________________________

Of your total payroll needed from item c, how much of that was the actual OVERTIME pay? ______________________________________________________________________________________________________________________________________________________

So, what is the option 1 total costs of paying the overtime? (should be your answer from d.) ___________________________________________________________________________

In this option, you will hire 100 additional employees @ $20.00 per hour. HOWEVER, there are fixed costs for each employee as follows:

$10,000 cost for benefits for each new employee

$ 5,000 one-time recruitment cost for each new hire

$ 3,000 one time training cost for each new hire

$12,000 termination payment that will be made to each new hire (remember than you will let them go after the contract period ends, and you already know this)

What is the total PER NEW EMPLOYEE of fixed costs (above)? ______________________________________________________________________________________________________________________________________________________

What would the total fixed costs be for hiring 100 new employees? ______________________________________________________________________________________________________________________________________________________

What is the salary only, per employee, needed to cover 40 hours of work for 52 weeks? ______________________________________________________________________________________________________________________________________________________

Add the amount of salary plus fixed costs per employee PLUS total fixed costs to get the total cost for OPTION 2. What is it? ______________________________________________________________________________________________________________________________________________________

Assume you have this other option on the table. You can pay HALF of the current employees overtime and only hire 50 new workers. What would that cost?

Find the cost of overtime for half of the employees (hint take half of the amount of item 1d) ______________________________________________________________________________________________________________________________________________________

Find the costs of hiring only 50 new workers (salary PLUS fixed cost), hint: take half the amount in 2e ______________________________________________________________________________________________________________________________________________________

What is the total cost for this option? ______________________________________________________________________________________________________________________________________________________

You are at decision time here. What is your recommendation to the executive team? WHY? __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Explanation / Answer

1) Total weekly wages for one employee for 44 hours of worktime = 40*20 + 4*30 = $ 920

2) Yearly wages for an employee = 52*920 = $ 47,840

3) Total payroll needed to cover 1000 employees = 47840*1000 = $ 47,840,000

4) Actual overtime pay out of the total payroll = 4*30/920 = 13%

Total $ amount of overtime pay = 4*30*52*1000 = $ 6,240,000

5) Total cost of paying the overtime = $ 6,240,000

6) Total per new employee of fixed cost = cost of benefits + one time recruitment cost + training cost + termination payment = 10000 + 5000 + 3000 + 12000 = $ 30,000

7) Total fixed cost hiring 100 new employees = 30000*100 = $ 3,000,000

8) Salary only, per employee, needed to cover 40 hours of work for 52 weeks = 52*40*20 = $ 41,600

9) Salary plus fixed cost = 30000 + 41600 = $ 71,600

10) Cost of overtime for half the employees = 50 employees * 52 weeks per year * 4 hours per week * $ 30 per hour = $ 312,000

11) Fixed cost of hiring 50 new workers = 50*30000 = $ 1,500,000

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