In response to how the sales incentives might be contributing to falling profits despite growing sales, Chan Company’s controller has produced the following information on last year’s sales to two customers who purchased a variety of products from the company: Customers Carlson Donner Sales ……………………………………………….......…………… $450,000 $400,000 Cost of goods sold ……………………………………....…. $180,000 $80,000 MSDA expenses, excluding sales commissions . $320,000 $65,000 Required (a) Which customer is more profitable for the company? (b) Compare a sales incentive scheme that pays 2% of sales revenue to an incentive scheme that pays 4% of customer profit. (c) How will each scheme affect salespersons’ desire to increase sales to each customer?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
In response to how the sales incentives might be contributing to falling profits despite growing sales, Chan Company’s controller has produced the following information on last year’s sales to two customers who purchased a variety of products from the company: Customers Carlson Donner
Sales ……………………………………………….......…………… $450,000 $400,000
Cost of goods sold ……………………………………....…. $180,000 $80,000
MSDA expenses, excluding sales commissions . $320,000 $65,000
Required
(a) Which customer is more profitable for the company?
(b) Compare a sales incentive scheme that pays 2% of sales revenue to an incentive scheme that pays 4% of customer profit.
(c) How will each scheme affect salespersons’ desire to increase sales to each customer?
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