Question

Fixed expenses are $17,000 per month. The company is currently selling 800 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 $5 per unit. In exchange, the sales staff would accept a decrease in their salaries of $6,000 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 200 units. What should be the overall effect on the company's monthly net operating income of this change?

Answer 1

Answer:

There is a cost-saving of $1,000 per month as a result of the change.  This cost-saving increases the monthly net operating income by $1,000.

Explanation:

a) Data and Calculations:

Fixed monthly expenses = $17,000

Current sales units per month = 800

Proposed sales commission per unit = $5

Decrease in salaries per month = $6,000

Increase in sales units per month = 200

                                                 Change

                                            Before       After      Difference

Fixed monthly expenses   $17,000   $11,000      $6,000

Variable cost per month               0     5,000       -5,000

Total cost per month         $17,000  $16,000      $1,000

Sales units per month              800      1,000           200 units

b) The effect on the company's monthly net operating income is a reduction in the total cost per month by $1,000.  There is also an increase in the units sold per month by 200 units.  If the selling price is determined, the net operating income will also increase by the product of the contribution margin per unit and 200.