Question

Data concerning Ulwelling Corporation's single product appear below:

Per Unit Percent of Sales Selling price $ 180 100 %

Variable expenses 45 25 %

Contribution margin $ 135 75 %

Fixed expenses are $1,048,000 per month.

The company is currently selling 9,400 units per month.

The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $12 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $106,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 440 units.

Required: What should be the overall effect on the company's monthly net operating income of this change? (Negative amount should be indicated by a minus sign.)

Change in Net Operating Income:

Answer 1

Computations
Particulars	Existing =9400 Units	Proposed =9840 Units	Change
Sales Revenue @ $180	$              1,692,000	$                 1,771,200	$    79,200
Variable Costs
Variable Costs @ $45	$                 423,000	$                    442,800	$    19,800
Sales Commissions @$12	$                           -	$                    118,080	$ 118,080
Total Variable Costs	$                 423,000	$                    560,880	$ 137,880
Contribution = Sales-Variable Costs	$              1,269,000	$                 1,210,320	$ (58,680)
Fixed Costs	$              1,048,000	$                    942,000	$(106,000)
Net Operating Income = Contribution - Fixed Cost	$                 221,000	$                    268,320	$    47,320
Change in Net Operating Income	$                   47,320