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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
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 b 300 units. What should be the overall effect on the company's monthly net operating income of this change?
Expert Solution
alculation for changes in net operating income of the business :
| Without increasing sales commission | With introducing sales commission | |
| Sales Revenue | 1,540,000 | 1,606,000 |
| Less: Variable Expenses | 308,000 | 401,500 |
| Contribution margin | 1,232,000 | 1,204,500 |
| Less: Fixed Expenses | 901,000 | 836,000 |
| Net Operating Income | 331,000 | 368,500 |
By introducing sales commission, overall Net Operating income per month would be increased by [ $ 368,500 - $ 331,000 ] = $ 37,500
Note: Total variable cost , without introducing sales commission = 7,000 X $ 44 = $ 308,000
Total variable cost, with introducing sales commission = [ 7,000 + 300 ] X [ $ 44 + $ 11] = $ 401,500.
Total fixed expenses, without introducing sales commission = $ 901,000.
Total fixed expenses, by introducing sales commission and reducing salaries expense stands [ $ 901,000 - $ 65,000 ] = $ 836,000
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