Question

Fuentes Systems provides security software to law enforcement agencies. It has a sales force of 70 and has plans to add another 10– 15 salespeople. Fuentes allocates corporate administrative costs based on the number of salespeople. The current total administrative cost of $ 2,184,000 comprises the costs of the human resources, payroll, accounting, and information technology departments.
You manage the western region of Fuentes Systems with 18 salespeople and you plan to add one or two more salespersons. Each salesperson you hire costs $ 120,000, which includes salary, benefits, and payroll taxes. If you hire one additional salesperson, you expect that person will generate $ 185,000 of net operating margin for your region. Net operating margin is revenues less cost of sales and less travel and entertainment expenses associated with that salesperson. Net operating margin does not include the salary, benefits, and payroll taxes of the salesperson. If you hire two salespeople, the combined additional net operating margin added to your region is expected to be $ 323,000. You are evaluated and rewarded as a profit center, where profits are calculated as net operating margin less the total salaries, benefits, and payroll taxes of all salespeople employed in the region, plus allocated corporate administrative costs.

Required:
a. What is the current allocated administrative cost per salesperson?
b. Assuming that your hiring of additional salespeople does not alter the allocated cost per salesperson, how many salespersons will you hire in the western region?
c. Suppose that Fuentes hires an additional 10 salespeople, and the total corporate administrative cost rises from $ 2,184,000 to $ 2,640,000. Should Fuentes continue to allocate corporate administrative costs to the regions? Explain why or why not.
d. Now suppose that Fuentes hires an additional 10 salespeople and the total corporate administrative cost rises from $ 2,184,000 to $ 2,200,000. Should Fuentes continue to allocate corporate administrative costs to the regions? Explain why or why not.



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  • CreatedDecember 15, 2014
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