You own the Mayer Electrical Distribution Company, and your goal is to maximize
ID: 456827 • Letter: Y
Question
You own the Mayer Electrical Distribution Company, and your goal is to maximize your before-tax profits. You currently pay salespeople a base salary and a flat 4 percent commission on sales. You sell three products. Following this question is an Excel spreadsheet printout titled “Current Situation” that gives the starting information.
Unit Costs do not include sales commission costs. You have 10 salespeople. You pay them $30,000 salary and $10,000 benefits each. This gives you $400,000 fixed sales costs. You have annual fixed costs of $1,400,000 (including fixed sales costs). Unfortunately, your firm keeps losing the best salespeople. You are considering several options to retain your best salespeople. (1) Increase the commission to 6 percent or (2) alter the commission structure to reflect the profitability of each product. You think that if the total compensation plan is increased for the sales force your sales will increase 10 percent next year due to retaining the best people and increased motivation. Without this increase in sales compensation, you think that sales will increase 4 percent. You might want to look at the potential financial impact of (a) doing nothing, (b) increasing the commission from a flat 4 percent to a flat 6 percent, or (c) increasing the commissions in a manner that reflects the profitability of each product.
Twelve You own the Mayer Electrical Distribution Company, and your goal is to maximize your before-tax profits. You currently pay salespeople a base salary and a flat 4 percent commission on sales. You sell three products. Following this question is an Excel spreadsheet printout titled “Current Situation” that gives the starting information.
Unit Costs do not include sales commission costs. You have 10 salespeople. You pay them $30,000 salary and $10,000 benefits each. This gives you $400,000 fixed sales costs. You have annual fixed costs of $1,400,000 (including fixed sales costs). Unfortunately, your firm keeps losing the best salespeople. You are considering several options to retain your best salespeople. (1) Increase the commission to 6 percent or (2) alter the commission structure to reflect the profitability of each product. You think that if the total compensation plan is increased for the sales force your sales will increase 10 percent next year due to retaining the best people and increased motivation. Without this increase in sales compensation, you think that sales will increase 4 percent. You might want to look at the potential financial impact of (a) doing nothing, (b) increasing the commission from a flat 4 percent to a flat 6 percent, or (c) increasing the commissions in a manner that reflects the profitability of each product.
1. What was your total profit before taxes this year?
2. What is your expected total profit before taxes next year if the sales force payment plan remains the same (and sales increase 4 percent)?
3. What is your expected total profit before taxes next year if you increase commissions to 6 percent?
Explanation / Answer
Given Information:
10 sales people;
Salary = $ 30,000 each means Total Salary = $ 300,000
Benefits (Commission)= $ 10,000 each means Total = $ 100,000
Fixed sales cost = $ 400,000
Annual Fixed Sales Cost (incl. commission) = $ 1,400,000
Decision is to take among the options as follows:
According to the Manager thinking
Find out (a) What was your total profit before taxes this year?
Currently paying 4% commission on sales means
4% of sales = $ 100000
4/100 X sales = 100000
Or sales amount = 100000 X 100 / 4 = $ 2,500,000
Sales Amount = $ 2,500,000
PBT = 2,500,000 – 1400,000
PBT = $ 1,100,000
Means new sales amount will be = 1.04 X 2,500,000 = $2,600,000
Now PBT = 2,600,000 – 1,400000
PBT = $ 1,200,000
Means New commission will be = 0.06 of sales amount
New Commission = 0.06 X 2500000
= 150,000
Total Fixed Sales cost = 300,000 + 150000
= 450,000
Annual fixed sales cost = 1450,000
PBT = 2500000 – 1450000
PBT = $ 1050000
The ANSWER accordingly is don’t increase the commission by 6% as the PBT is lower now.
Right answer is without this increase in sales commission, sales increase by 4% (option)
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