Decision Making Activities:
Nardeb company is a software producer and sales company. currently, it pays all sales staff on a fixed base salary. recently management has been considering switching sales staff across to an incentive based reward system. Nardeb's chief accountant Polly Xu has prepared some summarized numbers. for senior management to consider.
Michael Day comments that he cannot see the difference, as sales level and profit are unchanged. Xu argues that it is the difference in cost structure that matters. She argues that the entity is better off staying with the current structure, because the increase in profit is greater when sales levels increase than it would be with the incentive rewards..
with fixed rewards | with incentive rewards | |
sales | 2500000 | 2500000 |
variable costs | 1500000 | 2000000 |
contribution margin | 1000000 |
500000 |
fixed costs | 750000 | 250000 |
profit | 250000 | 250000 |
a. Explain the basis of Polly Xu's argument
Answer is given below
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