(a) Colour Zone makes and sells industrial paints in Hinchinbrook, NSW. Eduardo Garcia, the owner is considering two alternative plans for paying his four salespersons next year (2020). Plan A is a straight commission of the equivalent of $0.40 per gallon sold. Plan B is a salary equivalent of $20 000 each plus a commission of $0.20 per gallon.

Required:

Using cost equation, determine the number of gallons all four sales persons together would have to sell for Colour Zone to pay the same total compensation under the two plans.

(b) In 2019, Colour Zone operated at full capacity of 400 000 gallons. Each sales person was paid according to Plan A. The average sale price was $10 per gallon, and the average variable cost (excluding commission) was $6 per gallon. Fixed expenses totalled $1 000 000. Garcia believes that his sales force can sell 500 000 gallons in 2020 and every year thereafter if his company can produce them. He estimates that an additional committed fixed cost of $200 000 would be required to provide another 100 000 gallons of capacity.

Required:

(i) Compute 2020 operating income on a contribution margin income statement if Colour Zone acquires the additional capacity and produces and sells 500 000 gallons. Assume that Colour Zone switches to plan B (a salary of $20 000 each and commission of $0.20 per gallon) to pay sales person.

(ii) Repeat the above requirement (i), assuming that Colour Zone continues to pay compensation according to plan A (a straight commission of $0.40 per gallon).

(iii) At production and sales volume of 500 000 gallons per year, which employee compensation plan should the company use. Why?