Question

Forge, Inc. is trying to decide whether to increase the commission-based pay of its salespeople. Currently, each of its ten salespeople earns a 10% commission on the units they sell for $200 each, plus a fixed salary of $37,000 each. Forge hopes that by increasing commissions to 20% and decreasing each salesperson’s salary to $27,000, sales will increase because salespeople will be more motivated. Currently, sales are 12,000 units. Forge’s other fixed costs, NOT including the salespeople’s salaries, total $168,000. Forge’s other variable costs, NOT including commissions, total $40 per unit.

A. What is the current profit?

B. What is the current break-even point in units?

C. What would the break-even point in units be if commissions increased and salaries decreased?

D. If sales increase by 1,000 units, what will profit be under the new plan?

E. At what sales level would Forge be indifferent between the lower-commission and the higher-commission plan?

Answer 1

A.

Current profit=$1,142,000

B.

Break even point in units=Fixed cost/contribution per unit

=538000/140

3843 units

C.

.New break even point in units=Fixed cost/contribution per unit

= 438000/120

3650 units

D.

New profit=$1,122,000

E.

Difference between fixed cost/ difference between variable cost

=(538000-438000)/(140-120)

5000 units

Working:

Particulars	Current	Proposed
Sales units	12000	13000
Sales price	$             200.00	$          200.00
Less: Variable cost
Other Variable cost	$               40.00	$            40.00
Sales commission (200*10%) ; (200*20%)	$               20.00	$            40.00
Total variable cost	$               60.00	$            80.00
Contribution	$             140.00	$          120.00
Total contribution	$   16,80,000.00	$15,60,000.00
Less: Fixed cost
Fixed salary (37000*10) ; (27000*10)	$     3,70,000.00	$ 2,70,000.00
Other fixed cost	$     1,68,000.00	$ 1,68,000.00
Total Fixed cost	$     5,38,000.00	$ 4,38,000.00
Profit	$   11,42,000.00	$11,22,000.00