Question

Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying him $20 per unit instead. Sales are currently 200 units per month. Goldin believes the compensation change will increase unit sales by 80%. The current contribution margin is $80 per unit. If the change is implemented, net operating income will:

a. decrease by $1,000b. decrease by $7,000c. increase by $7,000d. increase by $1,000

Answer 1

C. Increase by $7,000

Step-by-step explanation:

Current net operating income

($80 x 200) - $5,000

$16,000-$5,000

= $11,000

With the change the net operating income will be:

($80 - $20) x 200 x 150%

($60)×200×1.5

($60)×300

= $18,000

$18,000-$11,000

=$7,000 Increase

Therefore If the change is implemented, net operating income will: be an increase of $7,000 per month because the current net operating income was $11,000 and with the change the net operating income was increased to $18,000 which is why the income will increase by $7,000.