CMA Exam Part 2 - Study Question 32 (Budgeting Sales Commissions based on Projected Sales)

Karmel, Inc pays out sales commission to its sales team in the month the company receives cash for payment. These commissions equal 5% of total (monthly) cash inflows as a result of sales. Karmel has budgeted sales of $300,000 for August, $400,000 for September, and $200,000 for October. Approximately half of all sales are on credit, and the other half are all cash sales. Experience indicates that 70% of the budgeted credit sales will be collected in the month following the sale, 20% the month after that, and 10% of the sales will be uncollectible. Based on this information, what should be the total amount of sales commissions paid out by Karmel in the month of October?

Solution: Determine the cash inflows in October going back to August. Separate each month in the following way.

October: $200K x 0.5 = $100K October yields only the cash sales which is 50% of total sales.

September: $400K x 0.5 x 0.7 = $140 K September yields 70% of credit sales which is 50% of total sales.

August: $300K x 0.5 x 0.5 = $30K August yields 20% of credit sales which is 50% of total sales.

$270K

Add the three subtotals and multiply by 5% which yields the budgeted commissions for October.

$270K x 5% = $13,500