Below is a variable costing income statement for Wilner Glass Company, a maker of bottles for the beverage industry. For the coming year, the company is considering hiring two additional sales representatives at $80,000 each for base salary plus 5 percent of their sales for commissions. The company anticipates that each sales representative will generate $900,000 of incremental sales.
Wilner Glass Company
Income Statement
For the Year Ending December 31, 2011
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Required:
a. Calculate the impact on profit of the proposed hiring decision. Should the company hire the two additional sales representatives?
b. Consider the analysis of the decision performed by the company's chief accountant and compare it to your analysis in part a. What is the fundamental flaw in the chief accountant's work?
Analysis by Chief Accountant
Incremental sales .............$1,800,000
Income per dollar of sales in 2011
$1,600,000 + $20,000,000 .......$0.08144,000
Less increase in base salary .........$160,000
Effect on profit .............$16,000