Question

In your new role as compensation​ analyst, you have been asked to estimate the dollar amount of the​ profit-sharing pool based on three approaches as well as the allocation of​ profit-sharing awards to eligible employees. The​ company's profits equal​ $35 million. You are considering the following three formulas for determining the total​ profit-sharing pool.

​First-Dollar of Profits​: The company agrees to share 3.0 percent of all profits up to​ $12 million.

Graduated First-Dollar-of-Profits​: The company agrees to share 2.0 percent of all profits up to​ $15 million, and 4.0 percent of all profits up to​ $40 million.

Profitability Threshold Formula​: The company will share 1.5 percent of the profits above​ $10 million up to $17 million.

There are 260 employees whose total annual base pay equals $2,100,00

The total​ profit-sharing pool​ for:

​(Round your answers to the nearest hundredths​ place.)

​(a) First-dollar of profits is

​$360,000360,000

​(b) Graduated​ first-dollar of profits is

​$1,400,0001,400,000

​(c) Profitability threshold formula is

​$255,000255,000

Based on the equal payments​ formula, the average​ profit-sharing award per employee​ (based on the total​ profit-sharing pools)​ for:

​(Round your answers to the nearest hundredths​ place.)

​(a) First-dollar of profits is

​$(blank) per employee

​(b) Graduated​ first-dollar-of-profits is

​$(blank) per employee

​(c) Profitability threshold formula is

​$(blank) per employee

Answer 1

Based on Equal Payments Formula, Every employee will receive equal profit based on total no of employees. So,

Under First-dollar of profits method-

a) Average Profit-sharing award / employee = $360,000/260 = $1384.62 per employee.

Under Graduated​ first-dollar-of-profits method-

b) Average Profit-sharing award / employee = $1,400,000/260 = $5384.62 per employee.

Under Profitability threshold method-

c) Average Profit-sharing award / employee = $255,000/260 = $980.77 per employee.