The management of a packaging materials company has decided to change how the company calculates the sales credit that forms the basis for determining the sales commissions for their sales force. Rather than use a salesperson’s sales revenue to calculate his/her sales credit, management now uses the profit-based compensation formula discussed in the chapter. To calculate the profitability factor, management uses the firm’s average contribution margin of 25 percent.
For a product with a target price of $500 per unit, calculate a salesperson’s sales credit for selling 10 units of the product at a price of (1) $450 per unit, (2) $500 per unit, and (3) $550 per unit.
What are the effects that this change is likely to cause on the behavior of the sales force? How might these effects be beneficial to the packaging materials company?
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