Question
Managers of Crane Distributors are evaluating the compensation system for the companys sales personnel. Currently, the two salespeople have a combined salary of $60,246 per
Managers of Crane Distributors are evaluating the compensation system for the companys sales personnel. Currently, the two salespeople have a combined salary of $60,246 per year and earn a 3% sales commission. The company is considering two alternatives to the current compensation system. The first alternative is to reduce total salaries to $50,246 and increase the sales commission to 5%. The second alternative is to eliminate the salaries and pay a 12% sales commission. Sales projections under each of the compensation systems are as follows:
Current system | $ | 1,027,232 | |
Salary and 5% commission | $ | 1,147,092 | |
12% commission | $ | 1,273,648 |
(a) Write the cost equations for the current compensation system and both alternative compensation structures. (Round unit cost to 2 decimal places, e.g. 52.75. If the cost equation has no variable or fixed component enter 0 for the amounts.)
Current system | = ( sales) + $ |
Salary and 5% commission | = ( sales) + $ |
12% commission | = ( sales) + $ |
(b) Given Cranes sales projections, and assuming that the cost of goods sold is equal to 30% of sales, which pay system would be the most profitable one for the company? Ignore all other costs. (Round unit cost to 2 decimal places, e.g. 52.75 and final answers to 0 decimal places, 5,725.)
Current system | Salary and 5% commission | 12% commission | ||||||||
Compensation expenseOperating incomeSales revenueCost of goods soldGross profit | $ | $ | $ | |||||||
Sales revenueCost of goods soldCompensation expenseGross profitOperating income |
|
|
| |||||||
Sales revenueCost of goods soldCompensation expenseGross profitOperating income | ||||||||||
Cost of goods soldGross profitOperating incomeCompensation expenseSales revenue |
|
|
| |||||||
Cost of goods soldCompensation expenseGross profitOperating incomeSales revenue | $ | $ | $ |
The most profitable pay system is | Current systemSalary and 5% commission12% commission |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started