Question

Data concerning Hinkson Corporation's single product appear below: Per Unit Percent of Sales Selling price $ 140 100 % Variable expenses 28 20 % Contribution margin 112 80 % Fixed expenses are $720,000 per month. The company is currently selling 8,000 units per month. The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $9 per unit. In exchange, the sales staff would accept a decrease in their salaries of $60,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 100 units. What should be the overall effect on the company's monthly net operating income of this change?

Answer 1

Answer:

Income will decrease by $1,700.

Explanation:

Giving the following information:

Selling price= $140

Variable expenses= 28

Contribution margin= 112

Fixed expenses are $720,000 per month.

The company is currently selling 8,000 units per month.

The marketing manager has proposed a commission of $9 per unit. In exchange, the sales staff would accept a decrease in their salaries of $60,000 per month.

Sales would increase by 100 units.

We need to calculate the effect of this change on the monthly income. We need to calculate the increase in units, the decrease in fixed costs, and the increase of variable costs.

New variable cost= 28 + 9= 37

Effect on income= 100* (140 - 37) + 60,000 - (9*8,000)

Effect on income= -$1,700

Income will decrease by $1,700.

Answer 2

Answer:

Therefore, The overall effect would be that the net operating income per month will decrease by $1,700

Explanation:

According to the given data the Revised net selling price per unit = $140 - sales commission = $140 - 9 = $131 / unit

To calculate the overall effect on the company's monthly net operating income of this change we would make the following calculations:

Units sold                               8000                8100       Increase/ decrease

sales revenue $131 per unit       $ 1,120.000 $ 10,61,100     $ -58,900

Less: variable cost $28 per unit $ 224,000  $ 2,26,800      $ 2,800

Contribution                             $ 8,96,000   $   8,34,300     $ -61,700

Fixed expense                   $   7,20,000   $ 6,60,000       $ -60,000

Net Operating Income           $   1,76,000   $   1,74,300     $ -1,700

Therefore, The overall effect would be that the net operating income per month will decrease by $1,700