Question

The Rozas Roofing Company sells seven different styles of roof tiles in stores throughout Southern California. The roof tiles have identical unit costs and selling prices. A unit is defined as a roof tile. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a fixed salary and a sales commission. Rozas Roofing is considering opening another store that is expected to have the revenue and cost relationships shown here:

UNIT VARIABLE COSTS (per roof tile)

Selling price	$25.00
Cost of roof tile	14.00
Sales commission	1.00
Variable Cost Per Unit	$15.00

ANNUAL FIXED COSTS

Rent	$ 50,000
Salaries	180,000
Advertising	70,000
Other fixed costs	30,000
Total Fixed Costs	$330,000

REQUIRED: (CONSIDER EACH QUESTION INDEPENDENTLY)

1)

a. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of $0.25 per unit in excess of the breakeven point, what would be the store’s operating income if 45,000 units were sold?

b. Refer to the original data. Calculate the number of units sold which the owner of WalkRite would be indifferent between the original salary plus commissions plan for salespeople and the higher fixed salaries only plan.

c. As owner, which sales compensation plan would you choose if forecasted annual sales of the new store were at least 62,000 units? What do you think of the motivational aspect of your chosen compensation plan?

d. Suppose the target operating income is $170,000. How many units must be sold to reach the target operating income under (a) the original salary plus commissions plan and (b) the higher fixed salaries only plan?

e. You open the new store on January 1, with the salary plus commission compensation plan in place. Because you expect the cost of the roof tiles to rise due to inflation and the booming economy, you place a firm bulk order for 50,000 roof tiles and lock in the $14 price per unit. But, toward the end of the year, only 48,000 roof tiles are sold, and you authorize a markdown of the remaining inventory to $12 per unit. Finally, all units are sold. Salespeople, as usual, get paid a commission of 4% of revenues. What is the annual operating income for the store?

Answer 1

part A,C and D are answered in picture and part B seems to have missing figure of Higher fixed salary, hence it can not be answered.

Sub-Part (b) of Part d also cannot be solved without the amount of Higher fixed salary.

Answere (c). If the breakeven point of original salary plus commission plan and fixed salary plan is below 62000 units, than owner should opt higher salary plan as it would lead to higher profits. It will also seems good to employees at the begining of the year or at the timing of joing the job, Although it may hurt the expectations of employees at the end of the year.
sen 1 Solu. 1(a) Calculation of Breakeven Point (BEP) BEP = Total fix Cost Variable profit pur = 33000 units BEP 330000 = 25-15 Cale of Operating Income at 45000 units 1125000 (675000) Total Revenue (45000x25) = - Variable Cost other than Manager) - (45000x15) Comission (3000) - manages Comission (12000 X 0.25); = 447000 (330000) 117000 Variable Profit Total fixed cost Operating Income - come (C) of the breakeven point of Original salary plus Commission plan is below 62000 units, than and fixed salary plan owner should opt Higher salary plan, as it will lead to higher profits. (d) (a) Using BEP formula, At 33000 units Profit = 0. Moocou330000" 2515 Target Profit = 170000

Target sales - 170000 25-15 + 33000 5oooo units,