QUESTION 2

ABC Company is a software producer and sales company. Currently, it pays all sales staff on a fixed base salary. Recently, management has been considering switching sales staff across to an incentive-based reward system. The chief accountant, Mr. Smart has prepared some summarised numbers (see below) for senior management to consider. ABC senior management, Ms. Sharp comments that she cannot see the difference, as the sales level and profit are unchanged. Mr. Smart argues that it is the difference in cost structure that matters. He argues that the entity is better off staying with the current struc ture, because the increase in profit is greater when sales levels increase than it would be with the incentive rewards.

CoursHeroTranscribedText: With fixed rewards With incentive rewards Sales $2 500 000 $2 500 000 Variable costs 1 500 000 2 000 000 Contribution margin 1 000 000 500 000 Fixed costs 750 000 250 000 Profit $_ 250 000 $ 250 000