In response to how the sale incentives might be contributing to falling profits
ID: 2602930 • Letter: I
Question
In response to how the sale incentives might be contributing to falling profits despite growing sales, Chan Company controller has produced the following information on last year’s sales to two customers that purchased a variety of products from the company:
A.) Which customer is more profitable for the company?
B.) Compare a sales incentive scheme that pays 2% of sales revenue to an incentive scheme that pays 4% of customer profit. How will each scheme affect saleperson's desire to increase sales to each customer?
Carlson Donner Sales $450,000 $400,000 Cost of goods sold $180,000 $80,000 MSDA expenses, excluding sales commissions $320,000 $65,000Explanation / Answer
Solution:
1)
Carlson
Donner
Sales
450,000
400,000
COGS
180,000
80,000
Gross Margin
270,000
320,000
Expenses-MDSA
320,000
65,000
Operating profit
-50,000
255,000
2)
The sum of the commissions exceeds the sales revenue scheme, and moreover the scheme will encourage the efforts of salespersons’ to sell to Carlson, which is unprofitable. Oon contrary the profit scheme will encourage sales efforts to target on Donner, the reason is that the Donner is profitable and Carlson is unprofitable. Furthermorer, at the stated commission rates, the company will be paying the less amount in commissions with the profit scheme compared to the sales revenue scheme
Carlson
Donner
Cost to company
Sales
450,000
400,000
Commission on sales revenue
2%
2%
Total commissions on revenue
9,000
8,000
17,000
Operating profit
-50,000
255,000
Commission on profit
4%
4%
Total commissions on profit
0
10,200
10,200
Carlson
Donner
Sales
450,000
400,000
COGS
180,000
80,000
Gross Margin
270,000
320,000
Expenses-MDSA
320,000
65,000
Operating profit
-50,000
255,000
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