PROBLEM 5-5. Using Information from a Variable Costing Income Statement to Make a Decision Below is a variable costing income statement for Wilner Glass Company, a maker of bottles for the beverage industry. For the coming year, the company is considering hiring two additional sales representatives at $60,000 each for base salary plus 3 percent of their sales for commissions. The company anticipates that each sales representative will generate $800,000 of incremental sales.

Wilner Glass Company Income Statement For the Year Ending 12/31/2006 Sales Less:

Variable cost of goods sold Variable selling expense Contribution margin Less:

Fixed production expense Fixed selling expense Fixed administrative expense Net income

$6,300,000 3,600,000 2,400,000 1,600,000 2,800,000

$18,000,000 9,900,000 8,100,000 6,800,000

$ 1,300,000 Required

a. Calculate the impact on profit of the proposed hiring decision. Should the company hire the two additional sales representatives?

b. Consider the analysis of the decision performed by the company's chief accountant and compare it to your analysis in part

a. What is the fundamental flaw in the chief accountant's work?

Analysis by Chief Accountant Incremental sales Income per dollar of sales in 2006 ($ 1 ,300,000 -* $ 1 8,000,000)

Less increase in base salary Affect on profit

$1,600,000 0.072 115,200 120,000

$ (4,800)