Moloney Corporation produces and sells a single product. Data concerning that pr

Question

Moloney Corporation produces and sells a single product. Data concerning that product appear below: Selling Price per unit......$200 Variable Exp. per unit.........80 Contribution Margin.......$120 Fixed expenses are $898,000 per month. The company is current selling 9,000 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 $16 per unit. In exchange, the sales staff would accept a decrease in their salaries of $117,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 100 units. What should be the overall effect on the company's monthly new operating income of this change?

Explanation / Answer

Current profits = 9000 * $120 - $898000 = $182000 Commission would decrease contribution margin. New contribution margin = $120 - 16 = $104 New fixed costs = $898000 - $117000 = $781000 Sales = 9100 units Profits = $104 *9100 - $781000 = $165400 The overall operating profit would fall by $16600

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