Question

Lawrence Corporation sells two ceiling fans, Deluxe and Basic. Current sales total 60,000 units, consist-ing of 39,000 Deluxe units and 21,000 Basic units. Selling price and variable cost information follow.

Deluxe Basic

Selling price ............................................................................................$86 $74
Variable cost ............................................................................................65 41

Salespeople currently receive flat salaries that total $400,000. 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:10% commission computed on gross dollar sales. Deluxe sales are expected to total 45,500 units; Basic sales are anticipated to be 19,500 units.
Plan B:30% commission computed on the basis of production contribution margins. Deluxe sales are anticipated to be 26,000 units; Basic sales are expected to total 39,000 units.

To do:
1. Define the term sales mix.
2. Comparing Plan A to the current compensation arrangement:
a. Will Plan A achieve management’s objective of an increased presence in the marketplace? Briefly explain.
b. From a sales-mix perspective, will the salespeople be promoting the product that one would logically expect? Briefly discuss.
c. Will the sales force likely be satisfied with the results of Plan A? Why?
d. Will Lawrence likely be satisfied with the resulting impact of Plan A on company profitability? Why?

Answer 1

1- Quantity of over-all sales that each product line or product produces, and which requires to be well-adjusted to accomplish the maximum sum of gross revenue.

2a. Yes, plan A will achieve management's objective of an increased presence in the marketplace.
This is due to Plan A sales opportunities to total (45,500+19,500) = 65,000 units. This relates
positively compared to the existing sales of 60,000 units.

2.b  Yes, from a sales-mix perspective, the salespeople will promote products that one would logically expect. Sales employees receive a commission created from their gross dollar
transactions. The following figures below demonstrates how the deluxe sales will consist of a better percentage of the total sales under Plan A; which is not a surprise seeing that the deluxe sales have a better marketing price than the basic; $86 as opposed to $74.

	Current unit	sales mix
Deluxe	39000	65%
Basic	21000	35%
Total	60000	100%

	Plan A	Sales mix
Deluxe	45500	70%
Basic	19500	30%
Total	65000	100%

2.c Yes, the sales force will likely be satisfied with the results of Plan A. Reason being is because the commissions overall will amount to $535,600 (5,356,000 x 10%), which equates positively in contrast to the existing leveled wages of $400,000.

Deluxe sales 45500*86. - 3913000

Basic sales 19500*74. - 1443000

Total. - 5356000

2.d. No, Lawrence will not likely be satisfied with the resulting impact of Plan A on company
profitability. Reason being is because the company will profit less underneath the new plan.

	Current plan	Plan A
Sales revenue
Deluxe	3354000	3913000
Basic	1554000	1443000
Total	4908000	5356000
Less variable cost
Deluxe	2535000	2957500
Basic	861000	799500
Sales Commission		535600
Total variable cost	3396000	4292600
Contribution margin	1512000	1063400
Salaries	400000
Net Income	1112000	1063400