Question

Glade, Inc. is trying to decide whether to increase the commission-based pay of its salespeople. Currently, each of its five salespeople earns a 12% commission on the units they sell for $100 each, plus a fixed salary of $41,100 per person. Glade hopes that by increasing commissions to 17% and decreasing each salesperson’s salary to $21,700, sales will increase because salespeople will be more motivated. Currently, sales are 17,000 units. Glade’s other fixed costs, NOT including the salespeople’s salaries, total $595,000. Glade’s other variable costs, NOT including commissions, total $16 per unit.  

a. What is the current profit?

Current Profit

?

b. What is the current break-even point in units? (Round your answer to the nearest whole number.)

Break-Even Point

? unit

  

c. What would the break-even point in units be if commissions are increased and salaries decreased? (Round your answer to the nearest whole number.)

Break-Even Point

? unit

d. If sales increase by 9,000 units, what will profit be under the new plan?

Profit under the new plan

?

e. At what sales level would Glade be indifferent between the lower-commission plan and the higher-commission plan?

Point of Indifference

? unit

Juniper Enterprises sells handmade clocks. Its variable cost per clock is $6.80, and each clock sells for $17.00. The company’s fixed costs total $7,446.    

How many units must Juniper sell to earn a profit of at least $6,834?

Sales

? units

Answer 1

a)

Commission = $100 X 12% = $12 per unit

Total variable cost per unit = $12 + $16 = $28

Total Fixed cost = ($41,100 X 5) + $595,000 = $800,500

Total Sales = $100 X 17,000 units = $1,700,000 (A)

Total Variable cost = $28 X 17,000 units = $476,000 (B)

Total Fixed cost = $800,500 (C)

Current profit = (A) - (B) - (C)

= $1,700,000 - $476,000 - $800,500

= $423,500

b)

Contribution margin per unit = Selling price per unit - Variable cost per unit

= $100 - $28

= $72

Breakeven point in units = Total Fixed cost / Contribution margin per unit

= $800,500 / $72

= 11,118 units

c)

Commission = $100 X 17% = $17 per unit

Total variable cost per unit = $17 + $16 = $33

Total Fixed cost = ($21,700 X 5) + $595,000 = $703,500

Contribution margin per unit = Selling price per unit - Variable cost per unit

= $100 - $33

= $67

Breakeven point in units = Total Fixed cost / Contribution margin per unit

= $703,500 / $67

= 10,500 units

d)

Total units sold = 17,000 units + 9,000 units = 26,000 units

Contribution margin per unit = $67 per unit

Total Contribution margin = 26,000 units X $67 = $1,742,000

Total Fixed Cost = $703,500

Profit = Total Contribution margin - Total Fixed cost

= $1,742,000 - $703,500

= $1,038,500

e)

Let “X” be the number of units sold

Total sales - Total Variable cost - Total Fixed expense

100X - 28X - $800,500 = 100X - 33X - $7,03,500

X = 19,400 units

2)

Contribution margin per unit = Selling price per unit - Variable cost per unit

= $17 - $6.80

= $10.2

Number of units to be sold to earn target profit = (Fixed cost + Target profit) / Contribution margin per unit

= ($7,446 + $6,834) / $10.2

= 1,400 units