Question

A company pays its salespeople salaries that total 1,780$ per month without commissions. However, a plan is considered where salespeople would receive a 5% commission, but their salaries would fall to a total of 1,000$ per month, meaning they will have a 780$ decrease in their salaries. Explain at what sales level is the company indifferent between the two compensation plans?

Answer 1

At 15600 Sales level company will be at indifference point .

Calculation and Explanation

Indifference point is the point or level at which both the Alternative at at par. ie profit at both the option will be Same

At Indifference Point

Profit at Plan 1 = Profit at Plan B

Profit = Sales - Variable Cost - Fixed Cost

Let Total Sales be X

X- 0 -1780 = X - 0.05X -1000

X-0.05X =-1000+1780

X =780/0.05

X =15600

Or Foumula for Indifference Point

Indifference Sales Level = Diffence Of Fixed Cost / Difference of Variable Cost per unit

Suppose selling price be $100

Here Fixed Cost is Salary of the Sales Person

Variable Cost for old Plan 1 = 0 as Fixed Salary is given.

Variable Cost for 2nd Plan= Commission = 5% of Selling price = 0.05×100

X =(1780-1000)/( 5 - 0 )

X =780/5

X =156 unit

Total Sale = 156×100 =15600