Moloney Corporation produces and sells a single product. Data concerning that product appear below:
Fixed expenses are $898,000 per month. The company is currently selling 9,000 units per month. 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 $117,000 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 100 units. What should be the overall effect on the company's monthly net operating income of this change?

Question

Moloney Corporation produces and sells a single product. Data concerning that product appear below: 
Fixed expenses are $898,000 per month. The company is currently selling 9,000 units per month. 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 $117,000 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 100 units. What should be the overall effect on the company's monthly net operating income of this change?

Quizplus · Accepted Answer

Before introducing sales commissions:
Total revenue = 9,000 x $88 = $792,000
Total expenses = $898,000 + (9,000 x $32) = $1,210,000
Net operating loss = $1,210,000 - $792,000 = $418,000

After introducing sales commissions:
Total revenue = (9,000 + 100) x $88 = $881,600
Total expenses = $898,000 + (9,000 x $16) - $117,000 = $779,000
Net operating income = $881,600 - $779,000 = $102,600

The overall effect on the company's monthly net operating income would be an increase of $102,600 - $418,000 = a decrease of $16,600. Therefore, the correct answer is B.

Moloney Corporation Produces and Sells a Single Product