“I simply don’t understand this! I went from a winner to a loser in one month because some bozo in accounting changed his spreadsheet,” griped LuAnne Leffler, a sales representative for DisplayCo, a firm that sells display stands to stores.
LuAnne and other sales representatives call on prospective clients to update them regarding new products and prices, to assess customer needs, and to take orders.
LuAnne was the top salesperson last year, generating $5 million of DisplayCo’s total annual revenue of $60 million. Much of LuAnne’s success stemmed from her close relationship with a major client that generated $3 million in annual revenue. LuAnne likes this client a great deal even though the client’s average order was smaller than DisplayCos’s overall average revenue per order of $8,000.
DisplayCo compensates its sales representatives based on their “margin,” computed as sales revenue less manufacturing and marketing costs. Under the current system, total manufacturing and marketing costs are allocated on the basis of revenue. For the most recent year, total manufacturing costs equaled 80% of revenue and total marketing costs amounted to 13.50% of revenue.
Recently, DisplayCo’s accountant decided to allocate marketing costs by the number of sales orders rather than revenue. The accountant based the marketing allocation rate on last year’s total marketing costs and sales orders. Manufacturing costs continue to be allocated at 80% of revenue. LuAnne’s reaction is to the new allocation procedure. Under the new system, she has slipped to second place for the most recent month, even though Betty Barnett, the first-place salesperson, recorded monthly sales of only $350,000 from 35 orders when LuAnne had raked in $400,000 from 60 orders.

Required:
a. For the most recent month, compute both LuAnne’s and Betty’s margin under the allocation system in place before the accountant revised the basis for allocating marketing costs.
b. Compute both LuAnne’s and Betty’s margin for the most recent month under the accountant’s revised allocation system.
c. Which system, the old system or the accountant’s revised version, do you believe better captures the profit from a customer? How can you further improve the allocation of marketing costs to customers when assessing the margin generated by individual salespersons?
d. How could a manager use information regarding the margin generated by each sales representative to motivate and reward her sales force?