Problem: Phatty Phun Corporation sells electronic games. Its three salespersons are currently being paid fixed salaries of $30,000 each; however, the sales manager has suggested that it might be more profitable to pay the salespersons on a straight commission basis. He has suggested a commission of 15% of sales.
Current data for Phatty Phun Corporation are as follows:
Sales volume . . . . . . . . . . . . . . . . . . . . . .15,000 units
Sales price . . . . . . . . . . . . . . . . . . . . . . . .$40 per unit
Variable costs . . . . . . . . . . . . . . . . . . . . . .$29 per unit
Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . $140,000
Required:
a. Assuming that Phatty Phun Corporation has a target income of $50,000 for next year, which alternative is more attractive?
b. The sales manager believes that by switching to a commission basis, sales will increase 20%. If that is the case, which alternative is more attractive? (Assume that sales are expected to remain at 15,000 units under the fixed salary alternative.)