S_Session 02 - Cost Concepts.pdf

Commission of 20 of sales dollars but are demanding

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commission of 20% of sales dollars , but are demanding an increase to 25% for the coming year. The company is considering employing its own sales people: Three sales people, at an annual salary of $30,000 each, plus total commissions of 5% of sales dollars . A sales manager would also be required at a fixed salary of $160,000. What do you need to know to make this decision? 20
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Some things that we need to know to make this decision: Will the commission increase change output? Do employees provide the same output? Do they have the same incentives? What is the cost driver? How much are we selling anyways?? 21
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Assuming that the only costs of employing an in-house sales force are salaries and commissions, is there any advice that we can provide the company with respect to the decision that it is considering? What can we say about the behavior of the cost for Independent Agents - all variable - cost driver revenue - 25% of sales In-house Sales Force - some fixed costs - $90,000 for sales people - $160,000 for manager - some variable costs - 5% of sales 22
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Cost Driver = Sales $ (=S) TC IH = TC A IF S = $1,250,000 Plot Selling Costs For Each of the Alternative 25 Fixed Cost = $90,000 + $160,000 = $250,000
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Fixed and Variable Costs With Uncertainty A company is trying to decide whether to introduce a low cost “net - watch” that has basic internet accessibility. The net-watch would be priced at $60, which is exactly twice the variable cost per unit to manufacture and sell. The fixed costs to introduce the net-watch are $250,000 per year. The following probability distribution estimates the demand for the product: Annual demand Probability 6,000 units 0.30 8,000 units 0.25 10,000 units 0.25 12,000 units 0.20 What is the expected annual operating income for the net-watch? What is the probability that the introduction of the net- watch will decrease the company’s annual operating income? 29
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