Question

Your company is considering paying a commission to the sales force to expand sales. You are charged by the Chief Financial Officer with 1) computing a new breakeven point, and 2) the operating profit increase by 20% with the new sales commission plan.

You spend the next week gathering information, analyzing the information, and performing various cost-volume-profit analysis. You generate a report showing the new plan should lead to a substantial increase in sales with a minimum increase in breakeven sales. You create a memo explaining this report and the president of the company is pleased with your information and plans to implement it.

A few days later you review your numbers and realize your analysis has missed using the sales personnel’s monthly salary and the fixed selling costs. You re-calculate your numbers and realize the results are drastically different.

You are unsure if you should report this new results to the CFO, who will have to tell the president of the error. Since you are new to the company, you are wondering what will happen if you do and do not report this issue.

1. Explain the issues with excluding the monthly salary and fixed selling costs in the calculation and why they are important.

2. What ethical issues do you need to understand, based on the results of your original and revised calculations?

3. Explain how this situation could have been avoided and who is responsible for the issue.

Answer 1

solution:- All the following are based on my assumption to tell you the right choice to be made current situation 8 - (10,000 units @ Treen Variable coet @ 4 per unit. profit - Volumn ratio = 60%. sales value > 100000 CTO oro atore Lesso Variable cost 7 40,000 (10000 X4) contribution 60,000 Less; - fixed cost NIL Profit 60,000 incremental sales @ 20% Need sales Value = 120000 (12000 XD) Less'- Variable cost =) 48,000 C12000 X4) Contribution 72,000 Less - fixed cost - Profit 57,600 Break-even sales fixed cost PV Ratio - - 14,400 60% 24,000

Here is the effect of excluding firaced coet sales Revenue (12000x10 ) » 120000 Less; - Variable coet ( 12000 X 4) - 48.00 contribution dk b e a 72000 Lesso - fixed costs NIL di Profit tibre dead orze | 72,000 as the profit shows 7 72000 when we exclude fined costs and which is not actual, but actual propit us & 57,600 that is why it is important to address fixed cost and also fixed cost tells as the Break - event point of Business and without fixed cost BEP is not Possible. (11) Ethical ussues are as follows - a. Problems should dee re-chacked at different devels. If it addressed it shoveld be Communicated to seniors Never to hide whether it effect the Business or not.

. In this situation or case some situations can be avoided like a computation of all Break-event Salent to cross check the figures. - But if essor stays been undedected then my self and companies chief financial offices will combinedly responsible for the error.