Question #5

As a general manager of Cortez Enterprises (CE), you are studying the addition of a new product that would have an expected selling price of $180 and expected variable cost of $120. A new salesperson must be hired because the company's current sales force is working at capacity. Two compensation plans are under consideration: Plan 1: An annual salary of $38,000 plus 10% commission based on gross sales dollars Plan 2: An annual salary of $180,000 and no commission Required:

1. Which of the two plans is more risky? Why?

2. At what level of sales would you be indifferent between the two plans? Which method would you prefer before and after this point?