Question

System Avengers Inc. (SAI) manufactures and sells products to business and industrial customers for $7,500 each. Sales person Robin is one of 50 company salespeople who are compensated by commission earnings only. All earn commissions of 20% on all sales revenues generated and additional 5% commission on all unit sales above 30 per year (on number 31 and on). The variable expense per sale is $2,000 excluding sales commissions. Salespeople are provided lead (potential customer) by the firm's marketing department. Robin's historical "close rate" on leads has be 16% or one out of every 6.25 leads provided.

What dollar amount of commission earnings are expected for Robin?

Answer 1

Given,

Number of leads provided by the marketing department for the current year = 400 leads

Robin's close rate = 16%

Number of calls expected to be closed = Close rate * Number of leads per year = 16% of 400 = 64.

Hence the required answer is 64 closures at a 16% steady close rate.

We have,

The selling price of each product = $7,500

The expense incurred on each product excluding sales revenue = $2,000

Hence the sales revenue per product = Selling price of each product - expense incurred on each product excluding sales revenue = $7,500 - $2,000 = $5,500

Sales commission per product = 20% of sales revenue = 20% of $5,500 = $1,100

Hence sales commision of Robin for the expected 64 products = 64*$1,100 = $70,400

Now as the company offers the additional commisson of 5% for all the products above the 30 unit sales. Hence as per this, Robin is eligible for 5% commison of 34 products(64 - 30).

Hence the additional sales commission for each product = 5% of $5,500 = $275

additional sales commission for 34 products = 34*$275 = $9,350

Hence the expected total comission earned by Robin = sales commision of Robin for the expected 64 products + additional sales commission for 34 products = $70,400 + $9,350 = $79,750