Forge,IncIs Trying to Decide Whether to Increase the Commission-Based Pay

question 60

Essay

Forge,Inc.is trying to decide whether to increase the commission-based pay of its salespeople.Currently,each of its ten salespeople earns a 10% commission on the units they sell for $90 each,plus a fixed salary of $30,000 each.Forge hopes that by increasing commissions to 20% and decreasing each salesperson's salary to $21,000,sales will increase because salespeople will be more motivated.Currently,sales are 12,000 units.Forge's other fixed costs,not including the salespeople's salaries,total $188,580.Forge's other variable costs,not including commissions,total $30 per unit.
a.What is current profit?
b.What is the current break-even point in units?
c.What would the break-even point in units be if commissions are increased and salaries decreased?
d.If sales increase by 1,000 units,what will profit be under the new plan?
e.At what sales level would Forge be indifferent between the lower-commission plan and the higher-commission plan?

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Definitions:

Discretionary Income

Discretionary income is the amount of an individual's income left for spending, investing, or saving after taxes and personal necessities (like food and shelter) have been paid.

Positively Correlated

A relationship between two variables where an increase in one variable is associated with an increase in the other.

Scientific Method

A systematic, organized series of steps that helps ensure objectivity and consistency in exploring a social or scientific question.

Inductive Reasoning

A logical process in which multiple premises, all believed true or found true most of the time, are combined to obtain a specific conclusion.