ACC 650 - REVISED PROBLEM 7-38

Problem 738 Sales Mix and Employee Compensation; Operating Changes (LO 7-4, 7-5) 2(c). Commissions, total: $535,600

Lawrence Corporation sells two ceiling fans, Deluxe and Basic. Current sales total 66,000 units, consisting of 44,000 Deluxe units and 22,000 Basic units. Selling price and variable cost information follow. Deluxe Basic Selling price .............................................................................................................................................. $92 $76 Variable cost ............................................................................................................................................. 64 38

Salespeople currently receive flat salaries that total $350,000. Management is contemplating a change to a compensation plan that is based on commissions in an effort to boost the companys presence in the marketplace. Two plans are under consideration:

Plan A: 8% commission computed on gross dollar sales. Deluxe sales are expected to total 50,000 units; Basic sales are anticipated to be 20,000 units. Plan B: 20% commission computed on the basis of production contribution margins. Deluxe sales are anticipated to be 28,000 units; Basic sales are expected to total 42,000 units.

Required: 1. Define the term sales mix. 2. Comparing Plan A to the current compensation arrangement: a. Will Plan A achieve managements objective of an increased presence in the marketplace? Briefly explain. b. From a sales-mix perspective, will the salespeople be promoting the product that one would logically expect? Briefly discuss. c. Will the sales force likely be satisfied with the results of Plan A? Why? d. Will Lawrence likely be satisfied with the resulting impact of Plan A on company profitability? Why? 3. Assume that Plan B is under consideration. a. Compare Plan A and Plan B with respect to total units sold and the sales mix. Comment on the results. b. In comparison with flat salaries, is Plan B more attractive to the sales force? To the company? Show calculations to support your answers.