Question

Data concerning A Corporation's single product appear below:

Per Unit Percent of Sales
Selling price $ 160 100%
Variable expenses 48 30%
Contribution margin $ 112 70%
Fixed expenses are $1,054,000 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 $8 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $100,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 500 units.
What should be the overall effect on the company's monthly net operating income of this change?

Answer 1

Effect on income= $73,600 increase

Step-by-step explanation:

Giving the following information:

Contribution margin $ 112

Increase in variable cost= $8 per unit.

Decrease in fixed costs= $100,000 per month.

Increase in sales unit= 500 units

To calculate the effect on income, we need to use the following formula:

Effect on income= effect on total contribution margin + decrease in fixed costs

Effect on income= 500*104 - 9,800*8 + 100,000

Effect on income= $73,600 increase