JJ Motors Inc. employs 45 sales personnel to market their line of luxury automob

ID: 2373888 • Letter: J

Question

JJ Motors Inc. employs 45 sales personnel to market their line of luxury automobiles. The average car sells for

$23,000, and a 6 percent commission is paid to the salesperson. JJ Motors is considering a change to the commission

arrangement where the company would pay each salesperson a salary of $2,000 per month plus a commission of

2 percent of the sales made by that salesperson. The amount of total monthly car sales at which JJ Motors would

be indifferent as to which plan to select is:

$2,250,000.

$3,000,000.

$1,500,000.

$1,250,000.

$4,500,000.

Answer (A) is correct. Given that X equals the cars

sold, the indifference equation and its solution are as

follows:

(6% x $23,000)X = (2% x $23,000)X + (45 x $2,000)

$920X = $90,000

X = 97.8261 Cars

At a price of $23,000 each, 97.8261 cars will sell for

$2,250,000. Another approach is to determine the

sales per person at which $2,000 is equal to a 4%

commission. This amount is $50,000 ($2,000 %u30FB.04)

per person, or $2,250,000 (45 x $50,000) for the

entire sales force.

Answer (B) is incorrect because, at sales of

$3,000,000, would be better off with the 6%

commission.

Answer (C) is incorrect because at sales of

$1,500,000, the sales people would be better off

with the salary and 2% commission.

Answer (D) is incorrect because, at sales of

$1,250,000, the sales people would be better off

with the salary and 2% commission.

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