Question

Managers of Crane Distributors are evaluating the compensation system for the company’s sales personnel. Currently, the two salespeople have a combined salary of $60,246 per year and earn a 3% sales commission.

The company is considering two alternatives to the current compensation system. The first alternative is to reduce total salaries to $50,246 and increase the sales commission to 5%. The second alternative is to eliminate the salaries and pay a 12% sales commission.

Sales projections under each of the compensation systems are as follows:

Current system	$	1,027,232
Salary and 5% commission	$	1,147,092
12% commission	$	1,273,648

(a) Write the cost equations for the current compensation system and both alternative compensation structures. (Round unit cost to 2 decimal places, e.g. 52.75. If the cost equation has no variable or fixed component enter 0 for the amounts.)

Current system	= ( × sales) + $
Salary and 5% commission	= ( × sales) + $
12% commission	= ( × sales) + $

(b) Given Crane’s sales projections, and assuming that the cost of goods sold is equal to 30% of sales, which pay system would be the most profitable one for the company? Ignore all other costs. (Round unit cost to 2 decimal places, e.g. 52.75 and final answers to 0 decimal places, 5,725.)

			Current system			Salary and 5% commission			12% commission
Compensation expenseOperating incomeSales revenueCost of goods soldGross profit		$			$			$
Sales revenueCost of goods soldCompensation expenseGross profitOperating income
Sales revenueCost of goods soldCompensation expenseGross profitOperating income
Cost of goods soldGross profitOperating incomeCompensation expenseSales revenue
Cost of goods soldCompensation expenseGross profitOperating incomeSales revenue		$			$			$

The most profitable pay system is

Current systemSalary and 5% commission12% commission

Answer 1