Question

In: Accounting

Data concerning Ulwelling Corporation's single product appear below: Per Unit Percent of Sales Selling price $...

Data concerning Ulwelling Corporation's single product appear below:

Per Unit Percent of Sales
Selling price $ 160 100 %
Variable expenses 48 30 %
Contribution margin $ 112 70 %

Fixed expenses are $1,054,000 per month. The company is currently selling 9,800 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 $8 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $100,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 500 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.)

Solutions

Expert Solution

Calculation of net operating income =

Sales

- variable costs

= Contribution

- fixed costs

= net operating income

Net operating income of present system =

Sales ( 9800 units × $160) = $1568000

- variable cost (9800 units × $48) = $470400

= Contribution (9800 units × $112)= $1097600

- fixed cost = $1054000

Net operating income = $43600

Net operating income as percentage of sales =

Net operating income / sales × 100

= $43600 / $1568000 × 100

= 2.78%

Net operating income of proposed system =

Sales units = 9800 + 500 = 10300 units

Variable cost pet unit = $48 + $8 = $56

( sales commission of $8 introduced)

Fixed cost = $1054000 - $100000 = $954000

Sales (10300 units × $160) = $1648000

- variable costs (10300 units × $56) = $576800

= Contribution (10300 units × $104) = $1071200

- Fixed costs = $954000

= Net operating income = $117200

Net operating income as percentage of sales =

Net operating income / sales × 100

= $117200 / $1648000 × 100

= 7.11%

Due to the proposed change, monthly net operating income increases by $73600 ($117200 - $43600).

And as a percentage of sales, monthly net operating income increases by 4.33% (7.11% - 2.78%).

Note -

1. Sales commission is a variable cost and is directly related to sales volume. Hence, variable cost per unit is increased by $8.

2. Salaries to staff is fixed cost and is to be paid every month even when there is no sales. Hence, if there is decrease in salaries, fixed cost of the company would be reduced. Therefore, in the proposed system, fixed costs are reduced by $100000.

ekkarill92 answered 1 year ago
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