Data concerning A Corporation\'s single product appear below: Per Unit Percent o

Question

Data concerning A 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.
What should be the overall effect on the company's monthly net operating income of this change?

Explanation / Answer

Contribution Margiin = $112 X 10,300 ( 9,800 + 500 increase) Contribution Margin $1,153,600 Less: Fixed Exp 1,054 Proposed Commission $8/unit x 10,300units 82,400 Salaries Decrease (100,000) 18,654 Net Operating Income $1,134,946

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