Thornbrough Corporation Produces and Sells a Single Product with the Following

question 128

Multiple Choice

Thornbrough Corporation produces and sells a single product with the following characteristics: The company is currently selling 7,000 units per month. Fixed expenses are $901,000 per month.
The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $11 per unit. In exchange, the sales staff would accept a decrease in their salaries of $65,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 300 units. What should be the overall effect on the company's monthly net operating income of this change?

• A) increase of $1,269,500
• B) increase of $37,500
• C) increase of $61,700
• D) decrease of $92,500

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Definitions:

Absorption Costing

A pricing strategy that incorporates all expenses associated with production - including raw materials, workforce wages, and both fluctuating and constant factory overheads - into a product's cost.

Period Cost

Expenses directly tied to time that are not directly tied to the production process, such as administrative expenses.

Variable Costing

A costing method that includes only variable production costs (direct materials, direct labor, and variable manufacturing overhead) in product costs.

Period Cost

Expenses that are not directly tied to the production process and are expensed in the period they are incurred, such as selling and administrative expenses.