Fairmount Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of SalesSelling price $120 100% Variable costs 36 30% Contribution margin $84 70% Fixed costs are $516,000 per month. The company is currently selling 7,000 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 $9 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $55,000 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 operating profit of these
changes?
What will be an ideal response?
| New contribution margin ($84 per unit - $9 per unit) | $ | 75 | |
| New unit monthly sales (7,000 units + 200 units) | 7,200 | ||
| New total contribution margin: | |||
| 7,200 units × $75 per unit | $ | 540,000 | |
| Present total contribution margin: | |||
| 7,000 units × $84 per unit | 588,000 | ||
| Change in total contribution margin | (48,000 | ) | |
| Plus savings in salespersons' salaries | 55,000 | ||
| Change in operating profit | $ | 7,000 |
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