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26 April, 07:59

Data concerning Bazin Corporation's single product appear below: Per Unit Percent of Sales Selling price $ 100 100 % Variable expenses 20 20 % Contribution margin $ 80 80 % Fixed expenses are $384,000 per month. The company is currently selling 6,000 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 $46,000 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 500 units. What should be the overall effect on the company's monthly net operating income of this change?

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  1. 26 April, 08:16
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    Effect on income = $27,500 increase

    Explanation:

    Giving the following information:

    Sales = (100*6,000) = 600,000

    Variable expenses = (20*6,000) = (120,000)

    Contribution margin = 480,000

    Fixed expenses = (384,000)

    Net income = 96,000

    The marketing manager has proposed a commission of $9 per unit. In exchange, the sales staff would accept a decrease in their salaries of $46,000 per month.

    New sales = 6,500 units

    We need to calculate the effect on the income of this change.

    Effect on income = 500 * (100 - 29) + 46,000 - (6,000*9)

    Effect on income = $27,500 increase

    Prove:

    Sales = (6,500*100) = 650,000

    Variable costs = (6,500*29) = (188,500)

    Contribution margin = 461,500

    Fixed costs = (338,000)

    net income = 123,500

    Difference = 123,500 - 96,000 = 27,500
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