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:

Elastic Demand

Refers to a situation where the quantity demanded of a good or service significantly changes in response to a change in price.

Inelastic Demand

A situation where the demand for a good or service is not significantly changed by alterations in its price.

Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in the price of that good, indicating how sensitive consumers are to price changes.

Price Discrimination

The strategy of selling the same product or service at different prices to different groups of consumers, based on their willingness or ability to pay.