Glade, Inc. is trying to decide whether to increase the commission-based pay of
ID: 2427909 • Letter: G
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 5% commission on the units they sell for $100 each, plus a fixed salary of $41,800. Glade hopes that by increasing commissions to 10% and decreasing each salesperson’s salary to $21,500, sales will increase because salespeople will be more motivated. Currently, sales are 19,000 units. Glade’s other fixed costs, NOT including the salespeople’s salaries, total $585,000. Glade’s other variable costs, NOT including commissions, total $12 per unit. a. What is the current profit? b. What is the break-even point in units? c.What would the break-even point in units be if commissions are increased and salaries decreased? d.If sales increase by 8,000 units, what will the 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?
Explanation / Answer
Particulars
Current
Proposed
Sales units
19,000
27,000
Sales price
100
100
Less: Variable cost
Other Variable cost
12
12
Sales commission
5
10
Total variable cost
17
22
Contribution
83
78
Total contribution
1,577,000
2,106,000
Less: Fixed cost
Fixed salary
41,800
21,500
Other fixed cost
585,000
585,000
Total Fixed cost
626,800
606,500
Profit
992,000
1,521,000
=$626,800/83
=7552 units
=$606,500/78
=7776 units
d.New profit=1,521,000
e.Difference between fixed cost/ difference between variable cost
=626,800-606,500/83-78
=4060 units
Particulars
Current
Proposed
Sales units
19,000
27,000
Sales price
100
100
Less: Variable cost
Other Variable cost
12
12
Sales commission
5
10
Total variable cost
17
22
Contribution
83
78
Total contribution
1,577,000
2,106,000
Less: Fixed cost
Fixed salary
41,800
21,500
Other fixed cost
585,000
585,000
Total Fixed cost
626,800
606,500
Profit
992,000
1,521,000
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