Glade, Inc. is trying to decide whether to increase the commission-based pay of its salespeople. Currently, each of its five salespeople earns a 15% commission on the units they sell for $100 each, plus a fixed salary of $40,000 per person. Glade hopes that by increasing commissions to 20% and decreasing each salesperson's salary to $25,000, sales will increase because salespeople will be more motivated. Currently, sales are 13,000 units. Glade's other fixed costs, NOT including the salespeople's salaries, total $580,000. Glade's other variable costs, NOT including commissions, total $20 per unit.a. What is current profit?b. What is the current break-even point in units?c. What would the break-even point in units be if commissions are increased and salaries decreased?d. If sales increase

Question

by 4,000 units, what will profit be under the new plan?e. At what sales level would Glade be indifferent between the lower-commission plan and the higher-commission plan?

What will be an ideal response?

Answer 1

a. $65,000 = ($100 × 13,000) - [(($100 × 15%) + $20) × 13,000] - [(5 × $40,000) + $580,000]
b. 12,000 = [(5 × $40,000) + $580,000]/[$100 - ($100 × 15%) - $20]
c. 11,750 = [(5 × $25,000) + $580,000]/[$100 - ($100 × 20%) - $20]
d. $315,000 = ($100 × 17,000) - [(($100 × 20%) + $20) × 17,000] - [(5 × $25,000) - $580,000]
e. 15,000: ($65 × Q) - $780,000 = ($60 × Q) - $705,000; Q = 15,000
 

Profit = (Unit price × Q) - (Unit variable costs × Q) - Total fixed costs. Break-even units = Fixed costs/Unit contribution margin. To find the point of indifference, set the profit functions under each plan equal to each other.