Jackie Company's CFO provided the following information on last year's sales for two customers that purchased a variety of products from the company

Scarborough Schultz
Sales $900,000 $800,000
Cost of Goods Sold 360,000 160,000
MSDA expenses, excluding sale commissions 640,000 130,000

a. Which customer is more profitable for the company?
b. Compare a sales incentive scheme that pays 3% of sales revenue to an incentive scheme that pays 5% of customer profit. How will each scheme affect salespersons' desire to increase sales to each customer?

a. Based on the information given, Schultz is more profitable and Scarborough is unprofitable:

Scarborough Schultz
Sales $900,000 $800,000
Cost of Goods Sold 360,000 160,000
Gross margin 540,000 640,000
MSDA expenses 640,000 130,000
Operating profit $-100,000 $510,000

b. The sum of the commissions is higher for the sales revenue scheme, and this scheme will encourage salespersons' efforts to sell to Scarborough, which is unprofitable. The profit scheme will encourage sales efforts to focus on Schultz, which the company prefers because Schultz is profitable and Scarborough is not. Moreover, at the stated commission rates, the company will pay less in commissions with the profit scheme than under the sales revenue scheme.
Cost to
Scarborough Schultz Company
Sales $900,000 $800,000
Commission on sales revenue 3% 3%
Total commissions on revenue $27,000 $24,000 $51,000
Operating profit $−100,000 $510,000
Commission on profit 5% 5%
Total commissions on profit $0 $25,500 $25,500