Fixed expenses are $720,000 per month. The company is currently selling 8,000 units 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 $9 per unit. In exchange, the sales staff would accept a decrease in their salaries of $60,000 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 100 units. What should be the overall effect on the company's monthly net operating income of this change?

Additional operating expense will be $12,900

The 100 units contribution per unit will also be considered in arriving at the net impact on Operating Income for the month.

Explanation:

When the Business decides to introduce sales men commission of $9 for every unit sold, note; the Fixed expense will remain unchanged.

Now let's review the elements of the income statement that will change as a result of this introduction.

Changes to Income Statement.

Add savings in Salaries of Salesmen = $60,000

Deduct commission on sales ($9 x 8,100) = 72,900

Net changes to company operating Expense = $12,900

What we have not been told is how much is the Average Contribution per unit of item sold. It is when we factor this contribution per Unit x the 100 units additional sales that we will safely conclude how much of the additional expense of $12,900 we would have covered or not.

Decreased of $1,700

Explanation:

Sales (8,000 units * $140, 8,100 units * $140)

$1,120,000 $1,134,000

Variable expenses

(8,000 units * 28, 8,100 units * $37)

$224,000, $299,700

Contribution margin

$896,000, $834,300

Fixed expenses

$720,000, $660,000

Net operating income

$176,000, $174,300

Decreased in net operating income

$176,000-$174,000 = $1,700

Therefore the overall effect on the company's monthly net operating income of this change is that net operating income will decrease by $1,700