Homework Help is Here – Start Your Trial Now!
Business
Accounting
P4.6 (LO 1, 2, 5), S Excel Maddie, the owner of a used car dealership, is working on compensation plans for her employees. She is trying to evaluate how a commission-based versus salary-based workforce would affect her bottom line. In considering her options, she finds basic financial information of two companies with similar year-end performance but different compensation plans-perfect examples to help her with her evaluation! Company X uses a commission-based approach, where its sales staff operates exclusively on commission. Com- pany Y, on the other hand, pays its sales staff a flat salary with no commission. Here are the basics for each company. Company Y Company X 10,000 units 10,000 units $ 50 $ 50 $ 20 $ 10 $100,000 $200,000 Current volume Selling price Variable cost per unit Fixed costs Required a. Present a contribution margin income statement for each company at its current volume of sales, and calculate the degree of operating leverage (DOL) for each.

P4.6 (LO 1, 2, 5), S Excel Maddie, the owner of a used car dealership, is working on compensation plans for her employees. She is trying to evaluate how a commission-based versus salary-based workforce would affect her bottom line. In considering her options, she finds basic financial information of two companies with similar year-end performance but different compensation plans-perfect examples to help her with her evaluation! Company X uses a commission-based approach, where its sales staff operates exclusively on commission. Com- pany Y, on the other hand, pays its sales staff a flat salary with no commission. Here are the basics for each company. Company Y Company X 10,000 units 10,000 units $ 50 $ 50 $ 20 $ 10 $100,000 $200,000 Current volume Selling price Variable cost per unit Fixed costs Required a. Present a contribution margin income statement for each company at its current volume of sales, and calculate the degree of operating leverage (DOL) for each.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
See similar textbooks
icon
Related questions
Question
P4.6 (LO 1, 2, 5), s Excel Maddie, the owner of a used car dealership, is working on compensation plans for her employees. She is trying to evaluate how a commission-based versus salary-based workforce would affect her bottom line. In considering her options, she finds basic financial information of two companies with similar year-end performance but different compensation plans-perfect examples to help her with her evaluation! Company X uses a commission-based approach, where its sales staff operates exclusively on commission. Com- pany Y, on the other hand, pays its sales staff a flat salary with no commission. Here are the basics for each company. Company X Company Y Current volume 10,000 units 10,000 units Selling price $ 50 $ 50 Variable cost per unit $ 20 $ 10 Fixed costs $100,000 $200,000 Required a. Present a contribution margin income statement for each company at its current volume of sales, and calculate the degree of operating leverage (DOL) for each. b. Utilizing the DOL from part (a), calculate the percentage and dollar amount that income will increase for each company if they both increase their sales by 30%. c. Utilizing the DOL from part (a), calculate the percentage and dollar amount that income will decrease for each company if they both decrease their sales by 30%. d. Maddie has used the DOL to make her projections in parts (b) and (c). Her advisory board, however, is not as familiar with the concept; they want to see full income statements in order to believe that income really would increase (or decrease) by these amounts due to a change in volume. Help Maddie present her anal- ysis more clearly to the board by preparing contribution margin income statements for both companies, under both the volume increase and decrease scenarios in parts (b) and (c). e. Forwhich type(s) of business(es) do you think a low(er) degree of operating leverage would be preferable? What about a high(er) degree of operating leverage? Explain your responses to both of these questions. f. How will this analysis help Maddie and her board make their decision on whether to create commission- based or salary-based compensation plans for their sales force?
Transcribed Image Text:P4.6 (LO 1, 2, 5), s Excel Maddie, the owner of a used car dealership, is working on compensation plans for her employees. She is trying to evaluate how a commission-based versus salary-based workforce would affect her bottom line. In considering her options, she finds basic financial information of two companies with similar year-end performance but different compensation plans-perfect examples to help her with her evaluation! Company X uses a commission-based approach, where its sales staff operates exclusively on commission. Com- pany Y, on the other hand, pays its sales staff a flat salary with no commission. Here are the basics for each company. Company X Company Y Current volume 10,000 units 10,000 units Selling price $ 50 $ 50 Variable cost per unit $ 20 $ 10 Fixed costs $100,000 $200,000 Required a. Present a contribution margin income statement for each company at its current volume of sales, and calculate the degree of operating leverage (DOL) for each. b. Utilizing the DOL from part (a), calculate the percentage and dollar amount that income will increase for each company if they both increase their sales by 30%. c. Utilizing the DOL from part (a), calculate the percentage and dollar amount that income will decrease for each company if they both decrease their sales by 30%. d. Maddie has used the DOL to make her projections in parts (b) and (c). Her advisory board, however, is not as familiar with the concept; they want to see full income statements in order to believe that income really would increase (or decrease) by these amounts due to a change in volume. Help Maddie present her anal- ysis more clearly to the board by preparing contribution margin income statements for both companies, under both the volume increase and decrease scenarios in parts (b) and (c). e. Forwhich type(s) of business(es) do you think a low(er) degree of operating leverage would be preferable? What about a high(er) degree of operating leverage? Explain your responses to both of these questions. f. How will this analysis help Maddie and her board make their decision on whether to create commission- based or salary-based compensation plans for their sales force?
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps with 2 images

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Evaluating Executive Compensations
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS