Question

Hamiel Corporation produces and sells a single product. Data concerning that product appear below: Percent of Per Unit Sales Selling price Variable expenses $240 100% 70% 168 Contribution margin 72 30% Fixed expenses are $301,000 per month. The company is currently selling 5,000 units per month. Required: The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $16 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $68,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 200 units. What should be the overall effect on the company's monthly net operating income of this change?

Answer 1

New contribution margin ($72 − $16).........................................$56
New unit monthly sales (5,000 units + 200 units).......................5,200
New total contribution margin: 5,200 units × $56 per unit..........$291,200
Present total contribution margin: 5,000 units × $72 per unit.....360,000
Change in total contribution margin............................................(68,800)
Plus savings in salespersons’ salaries..........................................68,000
Change in net operating income...................................................($800)