1. Calculate the number of units sold at which the owner of WalkRite would be indifferent between the original salary-plus-commissions plan for salespeople and the higher fixed-salaries-only plan.

(1) Let number of units sold be Q.

For indifference, profits under both plans must be equal, where

Profits = Quantity x (Selling price - Unit variable cost) - Fixed costs

Q x $(30 - 21) - $360,000 = Q x $(30 - 19.5) - $(360,000 + 81,000)

Q x 9 - 360,000 = Q x 10.5 - 441,000

Q x (10.5 - 9) = 81,000

Q x 1.5 = 81,000

Q = 81,000 / 1.5 = 54,000 units

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 motivational aspect of your chosen compensation plan?

(2) Let's compute profits under both plans when Q = 55,000.

(a) Commission plus fixed cost plan

Profit = 55,000 x $(30 - 21) - $360,000 = 55,000 x $9 - $360,000 = $(495,000 - 360,000) = $135,000

(b) Higher fixed salaries only plan

Profit = 55,000 x $(30 - 19.5) - $(360,000 + 81,000) = 55,000 x $10.5 - $441,000 = $(577,500 - 441,000)

= $136,500

Since profit is higher under Higher-fixed-salaries-only plan, this sales plan should be chosen.

Here, decision is driven by pure-profit motive.

3. Suppose the target operating income is $168,000. How many units must be sold to reach the target operat- ing income under (a) the original salary-plus-commissions plan and (b) the higher-fixed-salaries-only plan?

(3) Required units sold (Q) = (Fixed cost + Target operating income) / (Selling price - Unit variable cost)

(a) Commission plus fixed cost plan

Q = $(360,000 + 168,000) / $(30 - 21) = $528,000 / $9 = 58,667 units

(b) Higher fixed salary only plan

Q = $(360,000 + 81,000 + 168,000) / $(30 - 19.5) = $609,000 / $10.5 = 58,000 units

4. You open the new store on January 1, 2011, 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 price per unit. But, toward the end of the year, only 48,000 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?