Lawrence Corporation sells two ceiling fans, Deluxe and Basic. Current sales total 60,000 units, consisting of 39,000 Deluxe units and 21,000 Basic units. Selling price and variable cost information follow. Deluxe Basic Selling price $86 $74 Variable cost .............................................................. 65 41 Salespeople currently receive flat salaries that total $400,000. Management is contemplating a change to a compensation plan that is based on commissions in an effort to boost the company’s presence in the marketplace. Two plans are under consideration: Plan A: 10% commission computed on gross dollar sales. Deluxe sales are expected to total 45,500 units; Basic sales are anticipated to be 19,500 units. Plan B: 30% commission computed on the basis of production contribution margins. Deluxe sales are anticipated to be 26,000 units; Basic sales are expected to total 39,000 units. Required Comparing Plan A to the current compensation arrangement: a. Will Plan A achieve management’s objective of an increased presence in the marketplace? Briefly explain.
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.
Lawrence Corporation sells two ceiling fans, Deluxe and Basic. Current sales total 60,000 units, consisting of 39,000 Deluxe units and 21,000 Basic units. Selling price and variable cost information follow.
Deluxe Basic
Selling price $86 $74
Variable cost .............................................................. 65 41
Salespeople currently receive flat salaries that total $400,000. Management is contemplating a change to a compensation plan that is based on commissions in an effort to boost the company’s presence in the
marketplace. Two plans are under consideration:
Plan A: 10% commission computed on gross dollar sales. Deluxe sales are expected to total 45,500 units; Basic sales are anticipated to be 19,500 units.
Plan B: 30% commission computed on the basis of production contribution margins. Deluxe sales are anticipated to be 26,000 units; Basic sales are expected to total 39,000 units.
Required
Comparing Plan A to the current compensation arrangement:
a. Will Plan A achieve management’s objective of an increased presence in the marketplace? Briefly explain.
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