Bohlen Corporation produces and sells a single product. Data concerning that product appear below: Fixed expenses are $716,000 per month. The company is currently selling 6,000 units per month. Consider each of the following questions independently. This question is to be considered independently of all other questions relating to Bohlen Corporation. Refer to the original data when answering this question.
The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $16 per unit. In exchange, the sales staff would accept a decrease in their salaries of $84,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 600 units. What should be the overall effect on the company's monthly net operating income of this change?
A)increase of $74,400
B)increase of $64,800
C)decrease of $103,200
D)increase of $928,800

Question

Bohlen Corporation produces and sells a single product. Data concerning that product appear below:  Fixed expenses are $716,000 per month. The company is currently selling 6,000 units per month. Consider each of the following questions independently. This question is to be considered independently of all other questions relating to Bohlen Corporation. Refer to the original data when answering this question.
The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $16 per unit. In exchange, the sales staff would accept a decrease in their salaries of $84,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 600 units. What should be the overall effect on the company's monthly net operating income of this change?
A)increase of $74,400 
B)increase of $64,800 
C)decrease of $103,200 
D)increase of $928,800

Quizplus · Accepted Answer

Under the proposed plan, the sales commission expense would be:
$16 per unit * 600 units = $9,600 per month

The decrease in salaries for the sales staff would be:
$84,000 per month

The increase in sales revenue would be:
600 units * $90 per unit = $54,000 per month

The contribution margin per unit would be:
Selling price per unit - Variable cost per unit = $90 - $50 = $40

The contribution margin for the additional 600 units would be:
$40 * 600 units = $24,000

The overall effect on the company's monthly net operating income would be:

Net operating income = Total revenue - Total variable expenses - Total fixed expenses

Before the proposed plan:
Net operating income = (6,000 units * $40 contribution margin per unit) - $716,000 fixed expenses
Net operating income = $44,000

After the proposed plan:
Net operating income = (6,600 units * $40 contribution margin per unit) - $716,000 fixed expenses - $9,600 sales commission expense - $84,000 decrease in salaries
Net operating income = $108,400

The overall effect on the company's monthly net operating income would be an increase of $64,800. Therefore, the best choice is B.

Bohlen Corporation Produces and Sells a Single Product