Below is a variable costing income statement for Trio Office Supplies, a company well known for its quality high-volume automatic staplers. For the coming year, the company is considering hiring three additional sales representatives at $75,000 each for base salary plus 5 percent of their sales for commissions. The company anticipates that each sales representative will generate $400,000 of incremental sales.
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Analysis by Chief Accountant:
Incremental sales.......... $1,200,000
Income per dollar of sales in 2011:
$4,750,000 , $30,000,000 .......$ 158
Net increase in income from sales..... $ 189,600
Less increase in base salary...... $ 225,000
Effect on profit............. $ 35,400
Required:
a. Calculate the impact on profit of the proposed hiring decision. Should the company hire the two additional sales representatives?
b. Consider the analysis of the decision performed by the company's chief accountant and compare it to your analysis in part a. What is the fundamental flaw in the chief accountant's work?