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.

Required:
1. What payroll information does Turkey need in order to make a decision about adopting the alternative distribution method?
2. Assume the following information:

a. The average driver earns $42,000 per year.
b. Average employee income tax withholding is 15 percent.
c. The social security tax is 6.2 percent of the first $122,700 of earnings.
d. The Medicare tax is 1.45 percent of all earnings.
e. The state unemployment tax is 5 percent, and the federal unemployment tax is 0.6 percent of the first $7,000 of earnings.
f. Workers’ compensation insurance is 70 cents per $100 of wages.
g. The paper pays $300 per month for health insurance for each driver and contributes $250 per month to each driver’s pension plan.
h. The paper has liability insurance coverage for all teenage carriers that costs $100,000 per year.

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

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

Answer:

Valley Voice

1. It needs to know the total costs incurred under the old system and the new system.

2. See schedules below showing the costs under the two distribution systems.

3. The old system wins under economic considerations, especially given the fact that the publisher is currently experiencing profit squeeze.

4. If the amount paid per paper to the independent contractors can be renegotiated downwards, this may change the decision. With the new arrangement, will more papers be sold each day? Labor practices and laws do not favor the use of teenagers as workers. Will the company face some penalties or sanctions as a result? What about the bad publicity that the paper will face as a backlash following the use of teenagers? There are other considerations.

Explanation:

a) Data and Calculations:

Number of copies daily = 90,000

Number of copies yearly = 32,850,000 (90,000 * 365 days)

Average annual salary of a driver = $42,000

Total annual salary of drivers = $4,200,000

Average employee income tax withholding = 15%

Social security tax = 6.2% of the first $122,700 of earners

Medicare tax = 1.45% all earnings

State Unemployment tax = 5%

Federal Unemployment tax = 0.6% of the first $7,000 of earnings

Workers' compensation insurance = 0.7% ($0.70 per $100 of wages)

Health insurance for each driver = $3,600 ($300 * 12)

Pension Plan = $3,000 ($250 * 12)

Liability insurance coverage for all teenage carriers = $100,000 per year

Total cost under the old system:

Total annual salary of drivers ($42,000 * 100) $4,200,000

Social security tax = 6.2% of the first $122,700 = 7,607

Medicare tax = 1.45% all earnings = 60,900

State Unemployment tax = 5% 105,000 (1/2)

Federal Unemployment tax = 0.6% of the first

$7,000 of earnings ($700,000 * 0.6%) 4,200

Workers' compensation insurance = 0.7%

($0.70 per $100 of wages) ($4,200,000 * 0.7%) 29,400

Health insurance for each driver = $3,600 * 100

($300 * 12) 360,000

Pension Plan = $3,000 ($250 * 12) $3,000 * 100 300,000

Liability insurance coverage

for all teenage carriers = $100,000 per year 100,000

Payment to teenage carriers ($0.04 * 32,850,000) 1,314,000

Total payroll cost $6,481,100

Total cost under the new arrangement:

Total annual salary of drivers ($42,000 * 20) $840,000

Social security tax = 6.2% of the first $122,700 = 7,607

Medicare tax = 1.45% all earnings = 12,180

State Unemployment tax = 5% 21,000 (1/2)

Federal Unemployment tax = 0.6% of the first

$7,000 of earnings ($700,000 * 0.6%) 4,200

Workers' compensation insurance = 0.7%

($0.70 per $100 of wages) ($840,000 * 0.7%) 5,880

Health insurance for each driver = $3,600 * 20

($300 * 12) 72,000

Pension Plan = $3,000 ($250 * 12) $3,000 * 20 60,000

Payment to contractors ($0.20 * 32,850,000) 6,570,000

Total payroll cost $7,592,867