Scarborough, Inc. is trying to decide whether to increase the commission-based p

Question

Scarborough, Inc. is trying to decide whether to increase the commission-based pay of its salespeople Currently, each of its five salespeople earns a 15% commission on the units they sell for $100 each, plus a fixed salary of $40,000. Scarborough hopes that by increasing commissions to 20% and decreasing each salesperson's salary to $25,000. sales will increase because salespeople will be more motivated. Currently, sales arc 13,000 units. Scarborough's other fixed costs, NOT including the salespeople's salaries, total SS80.000. Scarborough's other variable costs, NOT including commissions, total $20 per unit. Required: What is current profit? What is the current break even point in units? What would the break even point in units be if commissions are increased and salaries decreased? If sales increase by 4,000 units, what will profit be under the new plan? At what sales level would Scarborough be indifferent between the lower-commission plan and the higher-commission plan?

Explanation / Answer

What is current profit?

At what sales level would scorpion be indifferent between the lower commission plan and the higher commission plan?

let No of Units At indifferent point be X

Sloving the below

Point of Indifference =75000/5 =15000 units

Amount Per Unit Sales Revenue 13000*100 1300000 100 Variable Cost Commsion 15%*1300000*5 sales Person 195000 15 Other variable cost 13000*20 260000 20 Contribution 845000 65 Fixed Cost fixed salary 40000*5 200000 other Fixed Cost 580000 780000 Current Profit 65000

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