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Data concerning Hill Corporation's single product appear below: Per Unit Percent of Sales Selling price $ 130 100 % Variable expenses 26 20 % Contribution margin $ 104 80 % Fixed expenses are $456,000 per month
Data concerning Hill Corporation's single product appear below:
|
Per Unit |
Percent of Sales |
||||||
|
Selling price |
$ |
130 |
100 |
% |
|||
|
Variable expenses |
26 |
20 |
% |
||||
|
Contribution margin |
$ |
104 |
80 |
% |
|||
Fixed expenses are $456,000 per month. The company is currently selling 5,000 units per month.
Required:
The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $10 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $53,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 90 units. What should be the overall effect on the company's monthly net operating income of this change?
Expert Solution
| Current Operating Income=Contribution Margin-Fixed Cost | |||
| Contribution Margin | $582,400 | (5000 X 104) | |
| Less:Fixed Cost | $(456,000) | ||
| A | Current Operating Income | $126,400 | |
| Current Contribution Margin Per Unit | $104 | ||
| Less:Commission Per Unit | $(10) | ||
| B | New Contribution Margin Per Unit | $94 | |
| Current Fixed Cost | $456,000 | ||
| Less:Decrease in Salary | $(53,000) | ||
| C | New Fixed Costs | $403,000 | |
| Current Sales Volume(Units) | $5,000 | ||
| Add:Increase in Unit(Units) | $90 | ||
| D | New Sales Volume(Units) | $5,090 | |
| E | New Operating Income | $75,460 | |
| (D X B)- C | |||
| F | Decrease in Operating iNcome | $50,940 | |
| (A-E) |
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