Reference no: EM132773563

Smoothit Inc is facing a problem with their Fourth quarter earnings on December 25. Their earnings target is $2,500,000 and the data so far is as follows:

Sales Revenue $25,000,000 ($500/unit)
Variable COGS $10,000,000 ($200/unit) # of units sold = 50,000
Fixed OH $10,000,000
Fixed S&A $ 2,000,000
Variable S&A 5% Commission on Sales

Smoothit has had a policy of having zero inventories at the end of each quarter. No further sales are possible during the year and all the units produced so far have been sold. The CEO is planning to cut the sales commission to meet the earnings target, but the accountant, Mr. Shady Helper, has an alternative plan of producing items for inventory.

Problem 1: How much will the sales commissions have to be cut in order to meet the earnings target?

Problem 2: How many items need to be produced for inventory to meet the earnings target if the sales commission is left unchanged at 5%

Problem 3: Comment on the ethics of each of these strategies.