COMM Company sells clothing for young adults. The firm has normal monthly fixed costs of $90,000 ($38,000 of this amount is fixed salaries). The firm's variable cost ratio averages 60%. The firm operates 3 stores in the mid-Atlantic region.
1. What is the monthly level of sales dollars needed to break even? _____________
2. What is the monthly level of sales dollars needed to earn an operating profit of $10,000 monthly?____________
3. What is the monthly level of sales dollars needed to earn an operating profit equal to 8% of monthly sales?___________
4. The firm is considering reducing monthly fixed salaries (currently $38,000) and using a combination salary and commission employee compensation plan. The reduction in fixed salaries would equal $10,000 monthly and a 3% of gross sales commission compensation payment would be added. The 3% would be shared by all fixed salary employees.
a. Calculate the new breakeven point in monthly sales dollars.
b. Calculate the new level of monthly sales dollars needed to earn an operating profit of $10,000 monthly.
5. MSM Company management believes that monthly sales should average approximately $375,000 during 2014. Prepare a contribution type income statement using (1) the current cost structure model ( the model that includes salaries but no commissions) and (2) a second contribution type income statement using the proposed (fixed salary plus commission) model.
6. From the employees' perspective, what level of monthly sales dollars must MSM achieve so that their monthly compensation under the combination fixed salary/commission model is equal to the current monthly fixed salary amount (currently $38,000).
7. Prepare commentary (about 1/2 page) that reviews / evaluates the pros and cons of making the proposed compensation structure change. I'm looking for a well rounded response that reflects upon changes in breakeven point, likely impact on employee morale / motivation, MSM operating profit at different sales levels, etc.