Refer to requirement 3 of 3-40. In this problem assume the role of the owner of Walk Rite.

In requirement 3 of 3-34

If sales commissions were discontinued for individual salespeople in favour of an $81,000 increase in fixed salaries, what would be the annual breakeven point in (a) units sold and (b) revenues?

REQUIRED

1. Calculate the number of units sold where the operating income under (a) a fixed-salary plan and (b) a lower fixed-salary-and-commission plan (for salespeople only) would be equal.

Above that number of units sold, one plan would be more profitable than the other; below that number of units sold, the reverse would occur.

2. As owner, which sales compensation plan would you choose if forecasted annual sales of the new store were at least 55,000 units? What do you think of the motivation aspects of your chosen compensation plan?

3. Suppose the target operating income is $168,000. How many units must be sold to reach the target under (a) the fixed-salary plan and (b) the lower fixed-salary-and-commission plan?

4. You open the new store on January 1, 2013, with the original salary-plus-commission compensation plan in place. Because you expect the cost of the shoes to rise due to inflation, you place a firm bulk order for 50,000 shoes and lock in the $19.50 per unit price.

But, toward the end of the year, only 48,000 pairs of shoes are sold, and you authorize a markdown of the remaining inventory to $18 per unit. Finally all units are sold.

Salespeople, as usual, get paid a commission of 5% of revenues. What is the annual operating income for the store?