Breakeven, CVP, potential cost structure change, employee reaction Ersatz manufactures a single product. The following income statement shows two different levels of activity, which are assumed to be within Ersatz's relevant range. You may want to use a spreadsheet to perform calculations.
Ersatz, Inc.
Income Statement
Activity Levels
Volume 1,000 units 1,500 units
Sales @ $100 each $100,000 $150,000
Less variable expenses
Manufacturing @ $40 each 40,000 60,000
Selling @ $10 each 10,000 15,000
Administration @ $6 each 6,000 9,000
Contribution margin 44,000 66,000
Less fixed expenses
Manufacturing 10,000 10,000
Selling 11,000 11,000
Administration 20,000 20,000
Pretax income $3,000 $25,000
E. Management expects that variable costs and selling prices will rise by 3%, but fixed costs will not change. What will the new breakeven point be? Explain the result.
F. Management wants to change the way that sales representatives are paid. At present, sales representatives are paid $11,000 î?? $10 per unit. Management will replace this formula with a payment of $20 per unit. At what level of sales will income be the same under both options?
G. Add the new cost function to the preceding CVP chart. H. Which of the two cost functions will minimize selling expenses assuming that sales are above the indifference level calculated in part (F)?
I. How would sales representatives be likely to respond to the new payment system?
J. Discuss the pros and cons to the company of changing the way sales representatives are paid.