Chapter 11, Problem 2CTP

The Valley Voice is a local newspaper that is published Monday through Friday. It sells 90,000 copies daily. The paper is currently in a profit squeeze, and the publisher, Tom Turkey, is looking for ways to reduce expenses.

A review of current distribution procedures reveals that the Valley Voice employs 100 truck drivers to drop off bundles of newspapers to 1,300 teenagers who deliver papers to individual homes. The drivers are paid an hourly wage while the teenagers receive 4 cents for each paper they deliver.

Turkey is considering an alternative method of distributing the papers, which he says has worked in other cities the size of Flower Mound (where the Valley Voice is published). Under the new system, the newspaper would retain 20 truck drivers to transport papers to five distribution centers around the city. The distribution centers are operated by independent contractors who would be responsible for making their own arrangements to deliver papers to subscribers’ homes. The 20 drivers retained by the Valley Voice would receive the same hourly rate as they currently earn, and the independent contractors would receive 20 cents for each paper delivered.

1. 1. What payroll information does Turkey need in order to make a decision about adopting the alternative distribution method?
2. 2. Assume the following information:
   1. a. The average driver earns $42,000 per year.
   2. b. Average employee income tax withholding is 15 percent.
   3. c. The social security tax is 6.2 percent of the first $122,700 of earnings.
   4. d. The Medicare tax is 1.45 percent of all earnings.
   5. e. The state unemployment tax is 5 percent, and the federal unemployment tax is 0.6 percent of the first $7,000 of earnings.
   6. f. Workers’ compensation insurance is 70 cents per $100 of wages.
   7. g. The paper pays $300 per month for health insurance for each driver and contributes $250 per month to each driver’s pension plan.
   8. h. The paper has liability insurance coverage for all teenage carriers that costs $100,000 per year.

Prepare a schedule showing the costs of distributing the newspapers under the current system and the proposed new system. Based on your analysis, which system would you recommend to Turkey?

1. 3. What other factors, monetary and nonmonetary, might influence your decision?

To determine

Discuss the list of payroll information that T needs in order to take decision to adopt alternative distribution method.

Explanation of Solution

Payroll: The total payment that a company is required to pay to its employee for the services received is called as payroll.

Payroll accounting: The process of payroll accounting includes the computation and payment of earnings of the employees and the payroll taxes to be paid to state and federal authorities as per applicable laws.

The following lists of payroll information are required to take decision:

• The hourly wage rate and wages paid to the truck drivers.
• The taxes rate related to social security, Medicare, and federal and state unemployment taxes.
• Other withholdings such as health insurance, pension contributions, and group life insurance.
• Employer’s obligations for workers’ compensation insurance.

To determine

Prepare a schedule that appears yearly cost of distributing the newspaper under the current system and the proposed new system.

Explanation of Solution

Prepare a schedule that appears yearly cost of distributing the newspaper under the current system.

Schedule of Yearly Cost of Distributing the Newspaper Under Current System
Particulars	Amount
Cost related to truck drivers (payroll):
Wages $\left(100\times \$42,000\right)$	$4,200,000
Social Security Tax $\left(\$4,200,000\times 0.062\right)$	$260,400
Medicare Tax $\left(\$4,200,000\times 0.0145\right)$	$60,900
State Unemployment Tax $\left(100\times \$7,000\times \text{0}.05\right)$	$35,000
Federal Unemployment Tax $\left(100\times \$7,000\times \text{0}.006\right)$	$4,200
Workers’ Compensation Insurance $\left(\$4,200,000\times \$0.70÷100\right)$	$29,400
Health Insurance $\left(100\times \$300\times 12\right)$	$360,000
Pensions $\left(100\times \$250\times 12\right)$	$300,000
Total Payroll Costs	$5,249,900
Add: Cost related to Teenage Carriers:
Payment per paper $\left(90,000\times \$0.04\times \left(5\text{days}\times 52\text{ weeks}\right)\right)$	$936,000
Liability Insurance	$100,000
Total Cost	$6,285,900

Table (1)

Prepare a schedule that appears yearly cost of distributing the newspaper under the proposed new system.

Schedule of Yearly Cost of Distributing the Newspaper Under Proposed New System
Particulars	Amount
Cost related to truck drivers (payroll):
Wages $\left(20\times \$42,000\right)$	$840,000
Social Security Tax $\left(\$840,000\times 0.062\right)$	$52,080
Medicare Tax $\left(\$840,000\times 0.0145\right)$	$12,180
State Unemployment Tax $\left(20\times \$7,000\times \text{0}.05\right)$	$7,000
Federal Unemployment Tax $\left(20\times \$7,000\times \text{0}.006\right)$	$840
Workers’ Compensation Insurance $\left(\$840,000\times \$0.70÷100\right)$	$5,880
Health Insurance $\left(20\times \$300\times 12\right)$	$72,000
Pensions $\left(20\times \$250\times 12\right)$	$60,000
Total Payroll Costs	$1,049,980
Add: Payment for independent contractor $\left(90,000\times \$0.20\times \left(5\text{days}\times 52\text{ weeks}\right)\right)$	$4,680,000
Total Cost	$5,729,980

Table (2)

Recommend: Proposed New System would be recommend to T, because Newspaper agency would get save of $555,920$\left(\$6,285,900-\$5,729,980\right)$, if T adopt this system.

To determine

Discuss the other factors that might influence to take decision to adopt alternative distribution method.

Explanation of Solution

In addition to payroll costs, T should consider the following factors to take decision to adopt alternative distribution method:

• Operating costs of the fleet of delivery trucks.
• The current cost to operate the trucks.
• The influence on the employee morale of terminating 80 truck drivers.
• Contract for the commitments of the delivery paper.
• The reliability and stability of the independent contractors.