Thornbrough Corporation produces and sells a single product with the following characteristics: Per Unit Percent of Sales Selling price $ 220 100 % Variable expenses 44 20 % Contribution margin $ 176 80 % The company is currently selling 7,000 units per month. Fixed expenses are $901,000 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 $11 per unit. In exchange, the sales staff would accept a decrease in their salaries of $65,000 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 300 units. What should be the overall effect on the company's monthly net operating income of this change? Multiple Choice increase of $1,269,500 increase of $37,500 increase of $61,700 decrease of $92,500

Respuesta :

Answer:

Increase in income= $37,500

Explanation:

Giving the following information:

The marketing manager has proposed a commission of $11 per unit. In exchange, the sales staff would accept a decrease in their salaries of $65,000 per month.

The marketing manager predicts that introducing this sales incentive would increase monthly sales by 300 units.

Per Unit Percent of Sales Selling price $ 220

Variable expenses 44

Contribution margin $ 176

Increase in income:

Sales= 300*176= 52800

Decrease in fixed costs= 65000

increase in variable cost= 11*7300=80,300 (-)

Increase in income= $37,500

Answer:

What should be the overall effect on the company's monthly net operating income of this change?

Increase of $37,500

Explanation:

  • It means that the changes of fixed cost to variable cost improve the Operating Income of the company  
  • It's better for the company to  pay a commission of $11 to the sales staff instead of a fixed salary.  

  • Original Income Statement without Changes

                 Income Statement

      7.000       Quantities

      $220     Unit Price

$1,540,000 Sales

-$44,0       Variable Cost

-$308.000 Total Cost

$1.231.956 Contribution Margin

-$901.000 Fixed Cost

$330.956 Operating Income

  • New version of Income Statement with the changes proposed

 Income Statement

7.300  Quantities

$220,0 Unit Price

$1.606.000 Sales

-$55,0 Variable Cost + Commission

-$401.500 Total Cost

$1.204.445 Contribution Margin

-$836.000 Fixed Cost

$368.445 Operating Income

  • $37.489   - Increase over the last situation.

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