Question

Problem 6: Sales commissiony s chapter 14. The company A makes a standard set and a deluxe set and sells them to retail department stores. The standard set sells for $20, and the deluxe set sells for $45. The variable expenses associated with each set are given below. Standard set Deluxe set Production costs $3 $30.5 Sales commission (10% selling price) $2 $4.5 Salespersons are paid on a commission basis to encourage them to be aggressive in their sales efforts. Mary, the financial vice president, watches sales commissions carefully and has noted that they have risen steadily over the last year. For this reason, she was shocked to find that even though sales have increased, profits for the current month - May - are down substantially from April. Sales, in sets, for the last two months are given below: Standard set Deluxe set April 4,000 2,000 May 1.000 5.000 The company A operates a kiosk at the local mall to sell standard sets. A currently pays $800 a month to rent the space and pays two full-time employees to each work 160 hours a month at $10 per hour. The store shares a manager with a neighboring mall and pays 50% of the manager's annual salary of $40,000 and benefits equal to 20% of salary. Required: 1. Explain the difference in net operating incomes between the two months, even though the same total number of sets was sold in each month. 2. What can be done to the sales commissions to improve the sales mix? 3. Assume the company A pays its employees hourly under the original pay structure but is able to pay the mall 8% of its monthly revenue instead of monthly rent. At what sales levels would the company A prefer to pay a fixed amount of monthly rent, and at what sales levels would it prefer to pay 8% of its monthly revenue as rent?

Answer 1

	1		April	May
			Standard	Delux	Total	Standard	Delux	Total
	a	Quantity Sold	4000	2000	6000	1000	5000	6000
	b	Sales Price per unit	$20	$45		$20	$45
	c=a*b	Sales Revenue	$80,000	$90,000	$170,000	$20,000	$225,000	$245,000
	d	Production cost per unit	$3.00	$30.50		$3.00	$30.50
	e=a*d	Total Production cost	$12,000	$61,000	$73,000	$3,000	$152,500	$155,500
	f	Sales Commission per unit	$2.00	$4.50		$2.00	$4.50
	g=d+f	Unit Variable Cost	$5.00	$35.00		$5.00	$35.00
	h=b-g	Unit Contribution	$15.00	$10.00		$15.00	$10.00
	j=c*10%	Total Sales Commission	$8,000	$9,000	$17,000	$2,000	$22,500	$24,500
	k=e+j	Total Variable Cost	$20,000	$70,000	$90,000	$5,000	$175,000	$180,000
	l=c-k	Contribution margin	$60,000	$20,000	$80,000	$15,000	$50,000	$65,000
		FIXED COSTS
	m	Rent			$800			$800
	n	Employee cost			$1,600			$1,600
	p	Managers Salary			$20,000			$20,000
	q=p*20%	Benefits			$4,000			$4,000
	r=m+n+p+q	Total Fixed costs			$26,400			$26,400
	X=l-r	Net Income			$53,600			$38,600
		EXPLANATION:
		Unit Contribution is higher for Standard Set.
		Hence, with reduction of Standard Set in May, Total Contribution Margin is reduced
		Hence, Net Operating Income is reduced
	2	Sales Commission for Standard set should be higher or the same for delux set should be lower to improve the sales mix
		NOTE: As per HOMEWORKLIB RULES, only one question should be answered