Question

Regarding to the question: Pitman Company is small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a commission of 15% selling price for all items sold. .... Can we get an answer to the following two questions?

9) Elaborate when sales agents will be willing to accept a decrease in commission.

Answer 1

The commission of sales agent primarily depends on two factors :

1) Sales price

2) Commission %

Commission is computed by multiplying the commission rate with sales price. Any change in either of the two is likely to effect the outcome ie monetary commission of the sales agent.

A sales agent will only be willing to accep a decrease in commission when there is a corresonding hike in the seling price to set off the decrease which is going to negatively affect the commission.

For eg 1

If sale price of the product is 100

commission will be 15.

Now if there is a decrease in commission to 10%, the commission agent will only accept it if the price is increased to the value which is equal to 10 times of earlier monetary value of commission ie 150

Verification

let price be x

10/100*x=15 (old monetary value of commission)

x = 150

therefore new monetary commission = 150*10/100 = 15

Similarly if earlier sale price is Rs.200 then commission is (15%) 30.

If commission rate is 10% then new price should be 300 (10/100*300 = 30). The answer can be easily be computed through the above equation.

Therefore an agent will only accept a decease in commission when the corresponding increase in selling price is equal to compensate the decrease in commission due to decrease in % commission earned by him.