Fairmount Corporation produces and sells a single product. Data concerning that product appear below:
$$\begin{array} { l r c }
& \text { Per Unit } & \text { Percent of Sales } \
\text { Selling price } & \$ 12 0& 100 \% \
\text { Variable costs } & 3 6 & 3 0 \% \
\text { Contribution margin }&\$ 4 & 70 \% \
\end{array}$$
Fixed costs are $516,000 per month. The company is currently selling 7,000 units per month.
Required:
The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $9 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $55,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 200 units. What should be the overall effect on the company's monthly operating profit of these changes?

Question

Fairmount Corporation produces and sells a single product. Data concerning that product appear below:
 $$\begin{array} { l r c } 
& \text { Per Unit } & \text { Percent of Sales } \
\text { Selling price } & \$ 12 0& 100 \% \
\text { Variable costs } &  3 6  & 3 0 \% \
\text { Contribution margin }&\$ 4 & 70 \% \
\end{array}$$ 
Fixed costs are $516,000 per month. The company is currently selling 7,000 units per month.
Required:
The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $9 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $55,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 200 units. What should be the overall effect on the company's monthly operating profit of these changes?

Quizplus · Accepted Answer

The Answer of Fairmount Corporation produces and sells a single product. Data concerning that product appear below:
 $$\begin{array} { l r c } 
& \text { Per Unit } & \text { Percent of Sales } \
\text { Selling price } & \$ 12 0& 100 \% \
\text { Variable costs } &  3 6  & 3 0 \% \
\text { Contribution margin }&\$ 4 & 70 \% \
\end{array}$$ 
Fixed costs are $516,000 per month. The company is currently selling 7,000 units per month.
Required:
The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $9 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $55,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 200 units. What should be the overall effect on the company's monthly operating profit of these changes?

Fairmount Corporation Produces and Sells a Single Product Fixed Costs Are $516,000 Per Month