![]() ![]() In fact, at $6,000,000 of sales, the manager’s compensation is twice as high if commissions are paid in lieu of the salary! Note that the commission begins to exceed the fixed salary at any point above $3,000,000 in sales. Following is a graph of commission cost versus salary cost at different levels of sales. At the upper extremes, the total compensation cost will be much higher with the commission-based scheme. But, do not assume that a lower break-even defines the better choice! Consider that the lower contribution margin will “stick” no matter how high sales go. This calculation uses the revised contribution margin ratio (60% – 4% = 56%), and produces a lower break-even point than with the fixed salary ($2,142,857 vs. Let’s see how this would change the break-even point: Break-Even Point in Sales = Total Fixed Costs / Contribution Margin Ratio $2,142,857 = $1,200,000 / 0.56 In recruiting the new sales manager, Leyland became interested in an aggressive individual who was willing to take the post on a “4% of sales” commission-only basis. This increase in break-even means that the manager needs to produce at least $200,000 of additional sales to justify his or her post. In this case, the fixed cost increased from $1,200,000 to $1,320,000, and sales must reach $2,200,000 to break even. If Leyland added a sales manager at a fixed salary of $120,000, the revised break-even would be: $2,200,000 = $1,320,000 / 0.60 Recall one of the original break-even calculations: Break-Even Point in Sales = Total Fixed Costs / Contribution Margin Ratio $2,000,000 = $1,200,000 / 0.60 Return to the example for Leyland Sports. To determine a revised break-even level requires that the new total fixed cost be divided by the contribution margin. CVP is useful for studying sensitivity of profit for shifts in fixed costs, variable costs, sales volume, and sales price.Ĭhanges in fixed costs are perhaps the easiest to analyze. Management must carefully analyze these changes to manage profitability. Chapter 24: Analytics for Managerial Decision MakingĬost structures can be anticipated to change over time.Chapter 23: Reporting to Support Managerial Decisions.Chapter 22: Tools for Enterprise Performance Evaluation.Chapter 21: Budgeting – Planning for Success.Chapter 20: Process Costing and Activity-Based Costing.Chapter 19: Job Costing and Modern Cost Management Systems.Chapter 18: Cost-Volume-Profit and Business Scalability.Chapter 17: Introduction to Managerial Accounting. ![]() Chapter 16: Financial Analysis and the Statement of Cash Flows.Chapter 15: Financial Reporting and Concepts.Chapter 14: Corporate Equity Accounting.Chapter 12: Current Liabilities and Employer Obligations.Chapter 11: Advanced PP&E Issues/Natural Resources/Intangibles.Chapter 10: Property, Plant, & Equipment.Chapter 6: Cash and Highly-Liquid Investments.Chapter 5: Special Issues for Merchants.Chapter 1: Welcome to the World of Accounting. ![]()
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