Example Question 9-25 pg.352

Cost Planning; Compensating Sales Staff The Jurassic Classics has four employees on its sales team and uses a compensation that provides each person with a base salary of $40,000 per year and the opportunity to earn commission on sales. The current commission is 5% of gross sales, and sales for the most recent period were $2,500,0000. Management is considering making a change to the compensation system and wants to evaluate two possible alternatives: going to a strictly commission-based compensation system and going to purely salary-based compensation. The strictly commission-based method would eliminate the salary but raise the commission to 11% of sales. If the purely salary-based approach is adopted, the salary for each person would rise to $70,000 and the commission would be eliminated.

Required:

1. Compute the total compensation of the sales team for all three options at $2,000,000, $2,500,000, and $3,000,000 of total sales.

2. What sales level would make management indifferent between the current compensation structure and the strictly commission-based structure?

3. What is the point of indifference between the current structure and the pure salary-based structure? What are some important factors that should be considered before making the decision?