Chapter 7, Problem 38P

1.

To determine

Explain the term sales mix.

Explanation of Solution

The term sales mix refers to the relative percentage of the total sales based on the provided number of products. In other words, it is expressed as a percentage of units sold for each product with respect to the total units sold for all the products.

2 a.

To determine

Explain Plan A comparing to current compensation to achieve management’s objective of an increased presence in the marketplace.

Explanation of Solution

Yes, plan A will achieve management’s objective of an increased presence in the marketplace because the current sales is 60,000 units whereas, plan A sales are expected to total 65,000 units (1).

Working note:

(1) Calculate the expected sales.

$\begin{array}{c}\text{Expected Sales}=\left(\text{Deluxe Sales}+\text{Basic Sales}\right)\\ =45,000\text{units}+19,500\text{units}\\ \text{=65,000 units}\end{array}$

2 b.

To determine

Explain if the salespeople be promoting the product that one would logically expect by comparing the Plan A to the current compensation.

Explanation of Solution

Yes, Salespeople promote the product that one would logically expect because they earn a commission based on gross dollar sales. The below table shows, deluxe sales contains a greater proportion of total sales under plan A. Therefore, the deluxe ($86) has a higher selling price than basic ($74).

Calculate the total sales (units).

Particulars	Current		Plan A
	Units	Sales Mix	Units	Sales Mix
Deluxe	39,000	65%	45,500	70%
Basic	21,000	35%	19,500	30%
Total	60,000	100%	65,000	100%

Table (1)

2 c.

To determine

Explain whether the sales force is likely to be satisfied with the results of Plan A and give reason.

Explanation of Solution

Yes, the sales force are satisfied with the result of plan A because commission totals $535,600 ($5,356,000 x 10%) when compared to the current salaries of $400,000.

Calculate the total sales

Particulars	Amount ($)
Deluxe sales (1)	3,913,000
Basic sales (2)	1,443,000
Total	5,356,000

Table (2)

Working Notes:

(1) Calculate the deluxe sales.

$\begin{array}{c}\text{Deluxe Sales}=\left(45,500\text{units }\times \text{Deluxe selling price}\right)\\ =45,000\text{units }\times \text{\$86}\\ \text{=\$3,913,000}\end{array}$

 (2) Calculate the basic sales.

$\begin{array}{c}\text{Basic Sales}=\left(19,500\text{units }\times \text{Basic selling price}\right)\\ =19,500\text{units }\times \text{\$74}\\ \text{=1,443,000}\end{array}$

2 d.

To determine

Explain if Mr. L is likely to be satisfied with the resulting impact of Plan A on company profitability. Give reason.

Explanation of Solution

From the below given table Mr. L will not be satisfied with the impact of Plan A because the company would be less profitable under the Plan A.

Calculate the net income.

Particulars	Current	Plan A
Sales revenue:
Deluxe	$3,354,000 (1)	$3,913,000 (2)
Basic	1,554,000(3)	1,443,000 (4)
Total Revenue	$4,908,000	$5,356,000
Less: Variable Cost:
Deluxe	2,535,000(5)	2,957,500(6)
Basic	861,000(7)	799,500(8)
Sales commissions		535,600(9)
Total Variable cost	$3,396,000	$4,292,600
Contribution Margin	$1,512,000	$1,063,400
Less: Fixed cost (salaries)	400,000
Net Income	$1,112,000	$1,063,400

Table (3)

Working Notes:

(1) Calculate the deluxe sales (current).

$\begin{array}{c}\text{Deluxe Sales}\left(\text{Current}\right)=\left(\text{39,000units}\times \text{Deluxe selling price}\right)\\ =39,000\text{units}\times \text{\$86}\\ \text{=3,354,000}\end{array}$

(2) Calculate the deluxe sales (Plan A).

$\begin{array}{c}\text{Deluxe Sales}\left(\text{Plan A}\right)=\left(\text{45,500units}\times \text{Deluxe selling price}\right)\\ =45,500\text{units}\times \text{\$86}\\ \text{=3,913,000}\end{array}$

(3) Calculate the basic sales (current).

$\begin{array}{c}\text{Basic Sales}\left(\text{Current}\right)=\left(\text{21,000units}\times \text{Basic selling price}\right)\\ =21,000\text{units}\times \text{\$74}\\ \text{=1,554,000}\end{array}$

(4) Calculate the basic sales (Plan A).

$\begin{array}{c}\text{Basic Sales}\left(\text{Plan A}\right)=\left(\text{19,500units}\times \text{Basic selling price}\right)\\ =19,500\text{units}\times \text{\$74}\\ \text{=1,443,000}\end{array}$

(5) Calculate the deluxe sales (current).

$\begin{array}{c}\text{Deluxe Sales}\left(\text{Current}\right)=\left(\text{39,000units}\times \text{Deluxe variable Cost}\right)\\ =39,000\text{units}\times \text{\$65}\\ \text{=2,535,000}\end{array}$

(6) Calculate the deluxe sales (Plan A).

$\begin{array}{c}\text{Deluxe Sales}\left(\text{Plan A}\right)=\left(\text{45,500units}\times \text{Deluxe variable cost}\right)\\ =45,500\text{units}\times \text{\$65}\\ \text{=2,957,500}\end{array}$

(7) Calculate the basic sales (current).

$\begin{array}{c}\text{Basic Sales}\left(\text{Current}\right)=\left(\text{21,000units}\times \text{Basic variable cost}\right)\\ =21,000\text{units}\times \text{\$41}\\ \text{=861,000}\end{array}$

(8) Calculate the basic sales (Plan A).

$\begin{array}{c}\text{Basic Sales}\left(\text{Plan A}\right)=\left(\text{19,500units}\times \text{Basic variable cost}\right)\\ =19,500\text{units}\times \text{\$41}\\ \text{=799,500}\end{array}$

(9) Calculate the sales commission.

$\begin{array}{c}\text{Sales commission }=\left(\text{10\% }\times \text{Sales revenue}\right)\\ =10\%\times 5,356,000\\ =535,600\end{array}$

3 a.

To determine

Comment on the results by comparing Plan A and Plan B with respect to total units sold and sales mix.

Explanation of Solution

From the above table, the total units sold under both plans are same. As judged by the contribution margin the sales mix has shifted under plan B in favor of the more profitable product. Deluxe has a contribution margin of $21 and basic has a contribution margin of $33.

 Calculate the total sales (units).

Particulars	Plan A		Plan B
	Units	Sales Mix	Units	Sales Mix
Deluxe	45,500	70%	26,000	40%
Basic	19,500	30%	39,000	60%
Total	65,000	100%	65,000	100%

Table (4)

3 b.

To determine

Show calculations in comparison with flat salaries, if Plan B is more attractive to the sales force and to the company.

Explanation of Solution

Calculate the net income.

Particulars	Current	Plan B
Sales revenue:
Deluxe	$3,354,000 (1)	$2,236,000(10)
Basic	1,554,000(3)	2,886,000(11)
Total Revenue	$4,908,000	$5,122,000
Less: Variable Cost:
Deluxe	2,535,000(5)	$1,690,000(12)
Basic	861,000(7)	1,599,000 (13)
Total Variable cost	$3,396,000	$3,289,600
Contribution Margin	$1,512,000	$1,833,000
Flat salaries	400,000
Commission		549,900(14)
Net Income	$1,112,000	$1,283,100

Table (5)

Working Notes:

(10) Calculate the deluxe sales (Plan B).

$\begin{array}{c}\text{Deluxe Sales}\left(\text{Plan B}\right)=\left(\text{45,500units}\times \text{Deluxe selling price}\right)\\ =26,000\text{units}\times \text{\$86}\\ \text{=2,236,000}\end{array}$

(11) Calculate the basic sales (Plan B).

$\begin{array}{c}\text{Basic Sales}\left(\text{Plan B}\right)=\left(\text{19,500units}\times \text{Basic selling price}\right)\\ =39,000\text{units}\times \text{\$74}\\ \text{=2,886,000}\end{array}$

(12) Calculate the deluxe sales (Plan B).

$\begin{array}{c}\text{Deluxe Sales}\left(\text{Plan B}\right)=\left(\text{26,000units}\times \text{Variable cost}\right)\\ =26,000\text{units}\times \text{\$65}\\ \text{=1,690,000}\end{array}$

(13)  Calculate the basic sales (Plan B).

$\begin{array}{c}\text{Basic Sales}\left(\text{Plan B}\right)=\left(\text{39,000units}\times \text{Variable cost}\right)\\ =39,000\text{units}\times \text{\$41}\\ \text{=1,599,000}\end{array}$

(14) Calculate the commission.

$\begin{array}{c}\text{Commission }=\left(\text{Contribution margin}\left(\text{Plan B}\right)\times 30\%\right)\\ =1,833,000\times 30\%\\ =549,9000\end{array}$

Plan B is more attractive to the sales force and to the company. Salespeople earn more under this plan; where Plan B’s salary is $549,900 and Current salary is $400,000. And company is more profitable; where Plan B’s net income is $1,283,100 and current net income is $1,112,000.