Question

You have just begun your summer internship at Omni Instruments. The company supplies sterilized surgical instruments for physicians. To expand sales, Omni is considering paying a commission to its sales force. The controller, Matthew Barnhill, asks you to compute: (1) the new breakeven sales figare, and (2) the operating profit if sales increase 15% under the new sales commission plan. He thinks you can handle this task because you learned CVP analysis in your accounting class. You spend the next day collecting information from the accounting records, performing the analysis, and writing a memo to explain the results. The company president is pleased with your memo. You report that the new sales commission plan will lead to a significant increase in operating income and only a small increase in breakeven sales. The following weck, you realize that you made an error in the CVP analysis. You overlooked the sales personnel's \$2,800 monthly salaries, and you did not include this fixed selling cost in your computations. You are not sure what to do. If you tell Matthew Bamhill of your mistake, he will have to tell the president. In this case, you are afraid Omni might not offer you permanent employment after your internship. Requirements How would your error affect breakeven sales and operating income under the proposed sales commission plan?

Answer 1

Neglecting the $2,800 monthly salaries in the CVP analysis results in an incorrectly low breakeven point and inflated operating income. Recalculation is necessary to provide accurate figures.

Step-by-step explanation:

Omitting the sales personnel's monthly salaries of $2,800 in the CVP (Cost-Volume-Profit) analysis would understate the company's fixed costs. This understatement of fixed costs would result in an inaccurately low breakeven sales figure and an overestimated operating income. To correct the error, you must recalculate the breakeven point by adding the $2,800 to the fixed costs. With a higher fixed cost, the breakeven sales figure will increase. Also, the operating profit with a 15% sales increase would decrease, as the additional fixed cost of sales personnel salaries would reduce the margins.