1. (25 Points) Chapter Twelve You own the Mayer Electrical Distribution Company, and your goal is to maximize your before-tax profits. You currently pay salespeople a base salary and a flat 4 percent commission on sales. You sell three products. Following this question is an Excel spreadsheet printout titled "Current Situation" that gives the starting information.
Unit Costs do not include sales commission costs. You have 10 salespeople. You pay them $30,000 salary and $10,000 benefits each. This gives you $400,000 fixed sales costs. You have annual fixed costs of $1,400,000 (including fixed sales costs). Unfortunately, your firm keeps losing the best salespeople. You are considering several options to retain your best salespeople. (1) Increase the commission to 6 percent or (2) alter the commission structure to reflect the profitability of each product. You think that if the total compensation plan is increased for the sales force your sales will increase 10 percent next year due to retaining the best people and increased motivation. Without this increase in sales compensation, you think that sales will increase 4 percent. You might want to look at the potential financial impact of (a) doing nothing, (b) increasing the commission from a flat 4 percent to a flat 6 percent, or (c) increasing the commissions in a manner that reflects the profitability of each product.
1. What was your total profit before taxes this year?
2. What is your expected total profit before taxes next year if the sales force payment plan remains the same (and sales increase 4 percent)?
3. What is your expected total profit before taxes next year if you increase commissions to 6 percent?