Data concerning Tiete Corporation\'s single product appear below: Fixed expenses

Question

Data concerning Tiete Corporation's single product appear below: Fixed expenses are $1,035,000 per month. The company is currently selling 9.400 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 $14 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $111,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 620 units. Required: What should be the overall effect on the company's monthly net operating income of this change? (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

Explanation / Answer

Fixed expenses will decrase by $111,000 and the variable expenses would ad an extra burden of $14 which is incentive, also the sales revnue will increase by 620 * 170 for extra units sold.

per unit % of sales Selling price                      170 100% variable expenses                        34 20% Contribution margin                      136 80% Fixed expenses          1,035,000 Unit sold                  9,400 Proposed commision                        14 Overall decrase in salaries              111,000 Increase in sales unit                      620               10,020 Old scenario Addition New scenario Sales          1,598,000             105,400          1,703,400 variable expenses              319,600               29,760             349,360 Contribution margin          1,278,400          1,354,040 Fixed expenses          1,035,000          (111,000)             924,000 Operating income              243,400             430,040 Increase in operating income             186,640

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