Question

Managers of Oriole Distributors are evaluating the compensation system for the company's sales personnel. Currently, the two salespeople have a combined salary of $72,207 per year and earn a 3% sales commission. The company is considering two alternatives to the current compensation system. The first alternative is to reduce total salaries to $62,207 and increase the sales commission to 5% The second alternative is to eliminate the salaries and pay a 12% sales commission Sales projections under each of the compensation systems are as follows: Current system $1,068,276 Salary and 5% commission $ 1,137,272 12% commission $1,313,556 (a) Write the cost equations for the current compensation system and both alternative compensation structures. (Round unit cost to 2 decimal places... 32.78. Ir the cos equation has no variable or fixed componenter for the amounts) Current system 1068276 sales) + S 22202 Salary and 5% commission 1137272 62207 x sales) 12% commission 1313556 x sales) - $

Answer 1

a) Cost Equations are as follows: Current System ($1068276*3%) + $ 72207) Salary and 5% comission ($ 1137272 * 5%) + $62207) 12 % commission = ($ 1313556 * 12%) + $ 0 )

Current System 12% commission Sales Revenue Less : Cost of Goods Sold @ 30% of sales Gross Profit Less : Compensation expense Operating Income $ $ $ $ $ 1,068,276 (320,483) 747,793 (104,255) 643,538 Salary and 5% commission $ 1,137,272 $ (341,182) $ 796,090 $ (119,071) $ 677,019 $ $ $ $ $ 1,313,556 (394,067) 919,489 (157,627) 761,862 The most profitable pay system is 12% commission As the 12% commission pay system option gives more operating income when compared to the current and other alternative pay systems. Hence 12% commission pay system is most profitable. Working Note: Compensation expense Current System Salary and 5% comission 12% commission ($1068276*3 %) +$ 72207) ($ 1137272 * 5 %) + $ 62207) ($ 1313556 +12%) + $ 0 = = = $ $ $ 104,255 119,071 157,627