Question

Glade, Inc. is trying to decide whether to increase the commission-based pay of its salespeople. Currently, each of its five salespeople earns a 7% commission on the units they sell for $100 each, plus a fixed salary of $40,100 per person. Glade hopes that by increasing commissions to 12% and decreasing each salesperson’s salary to $21,500, sales will increase because salespeople will be more motivated. Currently, sales are 17,000 units. Glade’s other fixed costs, NOT including the salespeople’s salaries, total $583,000. Glade’s other variable costs, NOT including commissions, total $16 per unit. a. What is the current profit? b. What is the current break-even point in units? (Round your answer to the nearest whole number.) c. What would the break-even point in units be if commissions are increased and salaries decreased? (Round your answer to the nearest whole number.) d. If sales increase by 10,000 units, what will profit be under the new plan? e. At what sales level would Glade be indifferent between the lower-commission plan and the higher-commission plan?

Answer 1

a.
		$ per unit	$ Total (Unit*C)
Unit Sold	17000
Selling Price Per unit		100	1700000
Less: Variable Cost
Other Variable cost	16		272000
Sales commission 7% (100*7%*5 person)	35		595000
Total Variable cost		51	867000
Contribution Margin		49	833000
Less: FIxed Cost
Other Fixed Cost			583000
Salary (40100*5)			200500
Total Fixed cost			783500
Profit (Contribution Margin-Fixed Cost)			49500
b.
Break Even (Fixed Cost/Margin per unit)	783500/49	15990
c
		$ per unit	$ Total (Unit*C)
Unit Sold	17000
Selling Price Per unit		100	1700000
Less: Variable Cost
Other Variable cost	16		272000
Sales commission 12% (100*12%*5 person)	60		1020000
Total Variable cost		76	1292000
Contribution Margin		24	408000
Less: FIxed Cost
Other Fixed Cost			583000
Salary (21500*5)			107500
Total Fixed cost			690500
Profit (Contribution Margin-Fixed Cost)			-282500
Break Even (Fixed Cost/Margin per unit)	690500/24	28771
d
		$ per unit	$ Total (Unit*C)
Unit Sold	27000
Selling Price Per unit		100	2700000
Less: Variable Cost
Other Variable cost	16		432000
Sales commission 12% (100*12%*5 person)	60		1620000
Total Variable cost		76	2052000
Contribution Margin		24	648000
Less: FIxed Cost
Other Fixed Cost			583000
Salary (21500*5)			107500
Total Fixed cost			690500
Profit (Contribution Margin-Fixed Cost)			-42500
e
Contribution at lower commission	49		182280
Contribution at Higherer commission	24		89280
Fixed Cost at lower	783500
Fixed Cost at higer	690500
To be indifference, let assume units are x
49x-783500=24x-690500
49x-24x=-690500+783500
25x=93000
x=3720
on 3720 units, he will be indifferent