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Calculating Profit Sharing Contributions

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Peteresbourgh 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.

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?

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Solution Summary

This solution provides a brief discussion of the given series of accounting questions.

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ANSWERS

Question A
1) Target profit level: $100 million x 18% = $18 million
Excess profit = $45 million - $18 million = $27 million
For profit sharing = 40%*$27 million = $10.8 ...

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