Using Information from a Variable Costing Income Statement to Make a Decision

Below is a variable costing income statement for Trio Office Supplies, a company well known for its quality high-volume automatic staplers. For the coming year, the company is considering hiring three additional sales representatives at $150,000 each in base salary. The company anticipates that each sales representative will generate $400,000 of incremental sales.

Trio Office Supplies

Income Statement

For the Year Ending December 31, 2017

Sales $30,000,000

Less:

Variable cost of goods sold $15,000,000

Variable selling expense3,000,00018,000,000

Contribution margin 12,000,000

Less:

Fixed production expense 2,000,000

Fixed selling expense 1,500,000

Fixed administrative expense 3,000,000 6,500,000

Net income $ 5,500,000

Required

a. Calculate the impact on profit of the proposed hiring decision. Should the

company hire thethree 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 $1,200,000

Income per dollar of sales in 2017:

($5,500,000 $30,000,000) .183

Net increase in income from sales 219,600

Less increase in base salary 450,000

Effect on profit ($ 230,400)