Question

Lawrence Corporation sells two ceiling fans, Deluxe and Basic. Current sales total 60,000 units, consisting of 39,000 Deluxe units and 21,000 Basic units. Selling price and variable cost information follow. ■ Problem 7–38 Sales Mix and Employee Compensation; Operating Changes (LO 7-4, 7-5) 2(c). Commissions, total: $535,600 Deluxe Basic Selling price .............................................................................................................................................. $86 $74 Variable cost ............................................................................................................................................. 65 41 Salespeople currently receive flat salaries that total $400,000. Management is contemplating a change to a compensation plan that is based on commissions in an effort to boost the company’s presence in the marketplace. Two plans are under consideration: Plan A: 10% commission computed on gross dollar sales. Deluxe sales are expected to total 45,500 units; Basic sales are anticipated to be 19,500 units. Plan B: 30% commission computed on the basis of production contribution margins. Deluxe sales are anticipated to be 26,000 units; Basic sales are expected to total 39,000 units. Required: 1. Define the term sales mix. 2. Comparing Plan A to the current compensation arrangement: a. Will Plan A achieve management’s objective of an increased presence in the marketplace? Briefly explain. b. From a sales-mix perspective, will the salespeople be promoting the product that one would logically expect? Briefly discuss. c. Will the sales force likely be satisfied with the results of Plan A? Why? d. Will Lawrence likely be satisfied with the resulting impact of Plan A on company profitability? Why? 312 Chapter 7 Cost-Volume-Profit Analysis 3. Assume that Plan B is under consideration. a. Compare Plan A and Plan B with respect to total units sold and the sales mix. Comment on the results. b. In comparison with flat salaries, is Plan B more attractive to the sales force? To the company? Show calculations to support your answers.

Answer 1

Lawrence Corporation Requirement 1 Quantity of over-all sales that each product line or product produces, and which requires to be well-adjusted to accomplish the maximum sum of gross revenue. Requirement 2a. Yes, plan A will achieve management's objective of an increased presence in the marketplace. This is due to Plan A sales opportunities to total (45,500 + 19,500) = 65,000 units. This relates positively compared to the existing sales of 60,000 units. Requirement 2b. Yes, from a sales-mix perspective, the salespeople will promote products that one would logically expect. Sales employees receive a commission created from their gross dollar transactions. The following figures below demonstrates how the deluxe sales will consist of a better percentage of the total sales under Plan A; which is not a surprise seeing that the deluxe sales have a better marketing price than the basic; $86 as opposed to $74. Deluxe Basic Total Current Units 39000 21000 60000 Plan A units 45500 19500 65000 Sales Mix 65.00% 35.00% 100.00% Sales Mix 70.00% 30.00% 100.00% Deluxe Basic Total

Requirement 2c. Yes, the sales force will likely be satisfied with the results of Plan A. Reason being is because the commissions overall will amount to $535,600 ($5,356,000 x 10%), which equates positively in contrast to the existing leveled wages of $400,000. Deluxe sales = 45,500 (units) * $86 Basic sales =19,500 (units) * $74 Over-all total 3913000 1443000 5356000 Requirement 2d. No, Lawrence will not likely be satisfied with the resulting impact of Plan A on company profitability. Reason being is because the company will profit less underneath the new plan. Sales Revenue Deluxe (39,000 units * $86); (45,500 units x $86) Basic (21,000 units * $74); (19,500 units x $74) Total Current Plan A 3354000 3913000 1554000 1443000 4908000 5356000 Less variable cost Deluxe (39,000 units x $65); (45,500 units x $65) Basic: (21,000 units x $41);(19,500 units x $41) Sales commissions (10% of sales profits) Total variable cost 2535000 2957500 861000 799500 535600 3396000 4292600 1063400 Contribution margin Salaries (1512000 - 400000) (1063400 - 0) Net Income 1512000 400000 1112000 1063400