Question

Using CVP to Compare Alternatives

Currently Bill’s salespersons have salaries totaling $80,000 (included in F of $360,000) and earn a 5% commission on each unit ($10 per briefcase). He is considering an alternative compensation arrangement where the salaries are decreased to $35,000 and the commission is increased to 20% ($40 per briefcase). Compute the BEP in units under the proposed alternative. Recall that P = $200 and V = $80 currently.

Answer 1

Fixed cost would become = 360,000 - 45,000

= $315,000

Variable cost per unit would become = 80 + 30

= $110

Contribution margin per unit = Selling price per unit – Variable cost per unit

= 200 - 110

= $90

Break even point (units) = Fixed cost/Contribution margin per unit

= 315,000/90

= 3,500

BEP in units under the proposed alternative = 3,500 units

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