Question

Data concerning Ulwelling Corporation's single product appear below:

	Per Unit		Percent of Sales
Selling price	$	200	100%
Variable expenses		46	23%
Contribution margin	$	154	77%

Fixed expenses are $1,043,000 per month. The company is currently selling 9,800 units per month.

The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $11 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $103,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 320 units.

Required:

What should be the overall effect on the company's monthly net operating income of this change? (Negative amount should be indicated by a minus sign.)

Answer 1

Current:
	Per unit	Total
Selling price	200	1960000
Variable expenses	46	450800
Contribution margin	154	1509200
Fixed expenses		1043000
Net operating income		466200
Revised:
	Per unit	Total
Selling price	200	2024000
Variable expenses	57	576840
Contribution margin	143	1447160
Fixed expenses		940000
Net operating income		507160
Net operating income increases by $40960 (507160-466200)