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Notes - Lecture 3.3.2 PDF

Salespeople are typically paid through commissions based on sales or a salary with commissions. Commissions solely based on sales can lead companies to earn lower profits if salespeople are incentivized to push higher-priced products that have lower contribution margins. For example, at Pipeline Unlimited salespeople would be motivated to sell the more expensive Turbo surfboard over the XR7, even though the XR7 has a higher contribution margin per unit. To avoid this conflict, companies should base commissions on contribution margin rather than just sales price alone.

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Sakiful Islam
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72 views

Notes - Lecture 3.3.2 PDF

Salespeople are typically paid through commissions based on sales or a salary with commissions. Commissions solely based on sales can lead companies to earn lower profits if salespeople are incentivized to push higher-priced products that have lower contribution margins. For example, at Pipeline Unlimited salespeople would be motivated to sell the more expensive Turbo surfboard over the XR7, even though the XR7 has a higher contribution margin per unit. To avoid this conflict, companies should base commissions on contribution margin rather than just sales price alone.

Uploaded by

Sakiful Islam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Structuring Sales Commissions

Companies generally compensate salespeople by paying them either a commission based on


sales or a salary plus a sales commission. Commissions based on sales dollars can lead to
lower profits in a company.

Illustrations

Case: Pipeline Unlimited produces two types of surfboards, the XR7 and the Turbo. The XR7
sells for $100 and generates a contribution margin per unit of $25. The Turbo sells for $150
and earns a contribution margin per unit of $18. The sales force at Pipeline Unlimited is
compensated based on sales commissions.

If you were on the sales force at Pipeline, you would push hard to sell the Turbo even
though the XR7 earns a higher contribution margin per unit.

To eliminate this type of conflict, commissions can be based on contribution margin rather
than on selling price alone.

Core Reading/Textbook

Garrison, Ray, H., Noreen, Eric, W., & Brewer, Peter, C. (2015). Managerial Accounting. [15th
Edition]. The McGraw-Hill, New York, USA.

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