ACC 650 - REVISED PROBLEM 7-38 - (Required 3) ■ Problem 7–38 Sales Mix and Employee...

ACC 650 - REVISED PROBLEM 7-38 - (Required 3)

■ Problem 7–38
Sales Mix and Employee
Compensation; Operating
Changes
(LO 7-4, 7-5)
2(c). Commissions, total:
$535,600

Lawrence Corporation sells two ceiling fans, Deluxe and Basic. Current sales total 66,000 units, consisting
of 44,000 Deluxe units and 22,000 Basic units. Selling price and variable cost information follow.

	Deluxe	Basic
Selling Price	$92	$76
Variable Cost	64	38

Salespeople currently receive flat salaries that total $350,000. Management is contemplating a change
to a compensation plan that is based on commissions in an effort to boost the company’s presence in the
marketplace. Two plans are under consideration:

Plan A: 8% commission computed on gross dollar sales. Deluxe sales are expected to total
50,000 units; Basic sales are anticipated to be 20,000 units.
Plan B: 20% commission computed on the basis of production contribution margins. Deluxe
sales are anticipated to be 28,000 units; Basic sales are expected to total 42,000 units.

Required:

3.	Assume that Plan B is under consideration.
	a. Compare Plan A and Plan B with respect to total units and the sales mix. Comment on the results.
	b. In comparison with flat salaries, is Plan B more attractive to the sales force? To the company?
	Show calculations to support your answers.

Expert Solution


		Delux	Basic
	Selling price	92	76
	Variable cost	64	38
	Contribution	28	38

	Under plan A Sales mix is expected 50000 units oof Deluxe and 20000 units of Basic

		Delux	Basic	Total
	Contribution per unit	28	38
	Units	50000	20000
	sales in value A	4600000	1520000	6120000
	Contribution B	1400000	760000	2160000
	Commission 8% on sales A*8/100	368000	121600	489600
	Profit B- commission	1032000	638400	1670400


	Under plan A Sales mix is expected 28000 units oof Deluxe and 42000 units of Basic

		Delux	Basic	Total
	Contribution per unit	28	38
	Units	50000	20000
	sales in value A	4600000	1520000	6120000
	Contribution B	1400000	760000	2160000
	Commission 20% on contribution B*20/100	280000	152000	432000
	Profit A- commission	1120000	608000	1728000


	In comparision of plan A with Plan b commission expense is more in Plan A so Plan B is more effiecient / beneficial . Profit in plan A = 1670400 and profit in plan B 1728000.


B)	Flat salary of sales rep is $ 350000.
	but in Plan a commision is $489600
	but in plan B commision is $432000

	As we see above more income to sales force is in plan A but which is not benefical to company .
	So in comparision to plan B which company would adopt Flat salaries are less attractive .
	hence Plan B is more attractive to sales force.

ekkarill92 answered 1 year ago

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