Calculating Profits based on Sales Commissions
Not what you're looking for?
Phatty Phun Corporation sells electronic games. Its three salespersons are currently being paid fixed salaries of $30,000 each; however, the sales manager has suggested that it might be more profitable to pay the salespersons on a straight commission basis. He has suggested a commission of 15% of sales.
Current data for Phatty Phun Corporation are as follows:
Sales volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,000 units
Sales price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40 per unit
Variable costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29 per unit
Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,000
Required
a. Assuming that Phatty Phun Corporation has a target income of $50,000 for next year, which alternative is more attractive?
b. The sales manager believes that by switching to a commission basis, sales will increase 20%. If that is the case, which alternative is more attractive? (Assume that sales are expected to remain at 15,000 units under the fixed salary alternative.)
Purchase this Solution
Solution Summary
The solution explains how to evaluate two alternatives by calculating the profits in both the cases.
Solution Preview
a. First we need to find out the sales level to get a target income of $50,000. The contribution margin per unit is 40-29=11 and the contribution margin ratio is 11/40=27.5%. The sales needed for a target net income of 50,000 are
(Fixed Cost + target net income)/Contribution margin ratio
sales ...
Purchase this Solution
Free BrainMass Quizzes
Basics of corporate finance
These questions will test you on your knowledge of finance.
Business Ethics Awareness Strategy
This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.
Introduction to Finance
This quiz test introductory finance topics.
MS Word 2010-Tricky Features
These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.
Balance Sheet
The Fundamental Classified Balance Sheet. What to know to make it easy.