Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying him $20 per unit instead. Sales are currently 200 units per month. Goldin believes the compensation change will increase unit sales by 50%. The current contribution margin is $80 per unit. If the change is implemented, net operating income will:

a. decrease by $1,000

b. decrease by $7,000

c. increase by $7,000

d. increase by $1,000

The net operating income will c. increase by $7,000

Explanation:

The formula to calculate net operating income is =

Gross income - Operating expenses

If Sales are equal to 200 units and the payment for a salesperson is

a flat salary of $5,000

Gross income = 200 * $80 = $16,000

and

Operating expenses = $5,000

so

Net operating income = $16,000 - $5,000 = $11,000

If we rise the Sales to 300 units then the payment for the salesperson will be 20$ * 300 = $6,000.

Gross income = 300 * $80 = $24,000

and

Operating expenses = $6,000

so

Net operating income = $24,000 - $6,000 = $18,000

$18,000 - $11,000 = $7,000