Breakeven, CVP, potential cost structure change, employee reaction Ersatz manufactures a single product. The following income statement shows two different levels of activity, which are assumed to be within Ersatz's relevant range. You may want to use a spreadsheet to perform calculations.

Ersatz, Inc.

Income Statement

Activity Levels

Volume 1,000 units 1,500 units

Sales @ $100 each $100,000 $150,000

Less variable expenses

Manufacturing @ $40 each 40,000 60,000

Selling @ $10 each 10,000 15,000

Administration @ $6 each 6,000 9,000

Contribution margin 44,000 66,000

Less fixed expenses

Manufacturing 10,000 10,000

Selling 11,000 11,000

Administration 20,000 20,000

Pretax income $3,000 $25,000

E. Management expects that variable costs and selling prices will rise by 3%, but fixed costs will not change. What will the new breakeven point be? Explain the result.

F. Management wants to change the way that sales representatives are paid. At present, sales representatives are paid $11,000 î?? $10 per unit. Management will replace this formula with a payment of $20 per unit. At what level of sales will income be the same under both options?

G. Add the new cost function to the preceding CVP chart. H. Which of the two cost functions will minimize selling expenses assuming that sales are above the indifference level calculated in part (F)?

I. How would sales representatives be likely to respond to the new payment system?

J. Discuss the pros and cons to the company of changing the way sales representatives are paid.