Reference no: EM132562089

Murtaza Corporation sells two models of home ice cream makers, Mister Ice Cream and Cold King. Current sales total 60,000 units, consisting of 21,000 Mister Ice Cream units and 39,000 Cold King units.

Selling price and variable cost information follows:

Mister Ice Cream Cold King

Selling price Rs.37.00 Rs.43.00

Variable cost Rs.20.50 Rs.32.50

Sales people currently receive flat salaries that total Rs.200,000. 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. Mister Ice Cream sales are anticipated to be 19,500 units. Cold King sales are expected to total 45,500 units.

Plan B: 30% commission computed on the basis of production contribution margins. Mister Ice Cream sales are expected to total 39,000 units. Cold King sales are anticipated to be 26,000 units.

Required:

Question 1. 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.

b. From a sales-mix perspective, will the salespeople be promoting the product that one would logically expect? Briefly discuss.

c. Will the sales force likely be satisfied with the results of Plan A? Why?

d. Will Premier likely be satisfied with the resulting impact of Plan A on company profitability? Why?

Question 2. Assume that Plan B is under consideration.

a. Compare Plan A and Plan B with respect to total units sold and the sales mix. Comment on the results.

b. In comparison with flat salaries, is Plan B more attractive to the sales force? To the company? Show calculations to support your answers.