689 Cases for Part 3 Case 3-4 Supersonic Stereo, Inc. “At this rate, I'll be looking for a new job,” thought Bob Basler, sales manager of Supersonic’s Atlanta district. “Our sales are stagnant, and what's worse, our prof- its are down.” Sales and profit results for the last five years did not measure up to objectives established for the Aanta district (see Exhibit 1). Basler knew that very shortly he would be hearing from Pete Lockhart, Supersonic’ national sales manager, and that the same question would be asked: “When are you going to tum the Atlanta district around?” Exhibit 1 Total sales and profit for the Atlanta district, 1980-1984 1980 1981 1982 1983 1984 Total sales.... $2,641,081 $2,445,120 $2,610,029 $2,514,113 $2,638,340 Net profit..... 13,873 14,050 15,981 16,511 14,383 Bob was faced with another problem that added to his worries. One of his sales representatives, Charlie Lyons, was very upset and was threatening to quit unless he received a substantial salary increase. Lyons felt that since he led the district in sales volume, he should be amply rewarded. “I have to find out what's happen- ing in the Auanta district before I go and make recommendations for salary in- creases,” Basler thought. “Besides, if I make such a recommendation, Pete will think that I have taken leave of my senses. He will not approve any salary in- creases for anybody as long as the Atlanta district’s performance is so weak.” Supersonic Stereo is one of the country's leading manufacturers of stereo equipment. Since its formation in 1962, Supersonic has experienced rapid growth, based largely on its reputation for high-quality stereo products. Prices were competitive, although some dealers engaged in discounting. Supersonic dis- tributed its stereo equipment on a selgctive basis. Only those dealers who could provide strong marketing support and reliable servicing were selected by Super- sonic. Dealers were supported by Supersonic’s national advertising campaign Advertising averaged 5 percent of sales, somewhat more than what other stereo manufacturers spent for this item. Supersonic’s sales force was compensated with salary plus commission of 6 percent based on gross margin. Gross margin was used to discourage sales repre- sentatives from cutting prices. Accounts were assigned to sales representatives based on size. New sales representatives were usually assigned a number of small accounts at first. As they progressed, they were assigned larger accounts. The more experienced sales representatives were assigned the larger, more desirable690 Part 3/ Evaluation and Control of the Sales Program Exhibit 2 accounts. In some cases, a sales representative would have only three or four accounts, each averaging $250,000 a year. ‘The average base salary for the sales force reached $26,500 in 1984. Commis- sions averaged $9,500 in 1984. Total average sales force compensation was $36,000 in 1984. Travel expenses were paid by Supersonic. The total package was considered by one executive to be too plush. This executive, Stella Jordan, felt that not enough was expected from the sales force. “I know of one sales represent- ative who calls on three accounts and in 1983 cared $38,563,” she stated at a recent meeting. “If we want to improve our profits, then we need to either reduce our-base salaries or cut back our commission rate.” Jordan’s suggestion was not favorably received by Basler, who felt that such a move would have a disastrous effect on sales force motivation. Stella countered by pointing out that motivation must be lacking since the Atlanta district's perform- ance is so poor. “If salaries or commissions cannot be reduced, at least let's not raise them,” she suggested. “Maybe we should consider raising quotas and not pay commissions until sales representatives exceed their quotas. Or,” she contin- ued, “maybe a management by objectives approach should be developed.” Basler knew that Jordan's comments demanded a response. He also knew that she was talking about Charlie Lyons when she mentioned a sales representative with three accounts earning $38,563. Basler suggested that he should be allowed time to do a complete cost analysis by sales representative before adopting any corrective action. Jordan agreed and offered her assistance. Salaries for the others were: Sand $24,500, Gallo $27,500, and Parks $26,000. Basler's first activity was to identify available information for his district. He was able to secure a profit and loss statement for the Atlanta district (see Exhibit 2). Jordan suggested that since Basler was interested in sales force profitability, Profit and toss statement, Atlanta district, 1984 Sales .. $2,638,340 Cost of goods sold . 2,014,485 Gross margin... 5 623,855 Expenses: Salaries . , Commissions 37,431 Advertising 131,915 Packaging, : 43,642 Warehousing and transportation . 76,374 ‘Travel expenses . 59,340 Ordér processing 770 Rent . . 83,000 Total expenses . 609,472 Net profit (before taxes). 5 14368Exhibit 3 Allocation of natural accounts to functional accounts, Atlanta district Functional Accounts Selling Selling Warehouse ’ Direct Indirect Order and Natural Accounts Costs Costs Advertising Processing Transportation Packaging Salaries ... $177,000 $106,500 $47,500 $12,000 $11,000 Commissions wees 37,431 37,43) Advertising........ 131,918 $131,915 Packaging. feet eneeee 43,642, 43,642, Warehousing and transportation... 76,374 $ 76,374 ‘Travel expenses ..... 59,340 ‘$7,340 2,000 Order processing ....... se 770 770 Rent ecceccseeserseee ses 83,000 18,500 4,500 40,000 20,000 Total expenses $609,472 $201,271 $60,000 $131,915 ‘$17,270 $116,374 $74,642 Exhibit 4 Product line sales and costs Selling Price Cost per Gross Margin Number Sold Sales ‘Advertising Product per Unit Unit per Unit in Period in Period Expenditures Packaging Receivers ...... $250 $212 $38 3,151 $ 787,750 $ 40,000 $ 6,302 Turntables % 64 21 12,079 1,026,715 30,000 24,158 Speakers....... 125 87 38 6,591 823,875 40,000 13,182 221 52,638,340 $130,000 543642692, Part 3/ Evaluation and Control of the Sales Program his next step should be to allocate the natural accounts in Exhibit 2 to their appropriate functional accounts. Exhibit 3 shows the results of this step. “If we are going to do an analysis by sales representative, we need much more information,” Stella indicated. To help in this regard, she compiled product sales data (see Exhibit 4). Basler provided data for each sales representative, showing number of sales calls, number of orders, and unit sales by product line (see Exhibit 5). The next step would be to compile the data to develop a profitability analysis by sales repre- sentative. Exhibit 5 Sales calls. orders, and units sold by salesperson Number of Units Sold m7 Number of Number of Salesperson Sales Calls Orders Receivers Tumtables Speakers Total Paul Sand........ 85 0 668 2,652 1,834 4,854 Diane Gallo ...... 105 85 823 3,270 1,582 5,675 Kathy Parks ......110 60 816 3,131 1,978 5.525 Charlie Lyons 170 7S 844 3,026, 1,897 5,767 70 280 3151 12,079 6501 Tei The problem with Charlie Lyons is still there, mused Basler. He wants more money and Stella Jordan thinks he is overpaid and underworked. Since Charlie 7 Lyons is something of a focal point, we ought to doa profitability analysis for each of his customers. Basler's next step was to compile data by customer. Exhibit 6 presents customer data for each of Lyon's three accounts. Preparing guidelines for allocating costs to sales representatives and custom- ers was Basler’s next task. Based on his review of several distribution cost and analysis textbooks and further conversations with Stella Jordan, Basler developed the following guidelines: Functional Cost Item Basis of Allocation Direct selling .......... --...Number of calls x average time spent with each 3 customer ‘Commissions ....... -+++.6 percent of gross margin Travel..... -++++++-Total travel costs divided by number of calls; + this figure is then multiplied by individual salesperson calls or customer calls Advertising -+++...5 percent of sales dollars Packaging. .---- Number of units x $2 Warehousing and transportation . ... Number of units x $3.50 Order processing ... -++++++..Number of orders x $2.75 looExhibit 6 Customer activity analysis for Charlie Lyons Average Time ee Customers of Number of Spent on Each Number of a Es eed _ Charlie Lyons Sales Calls Call (minutes) Orders Receivers Turntables Speakers Total ~ American TV .......... 65 35 40 422 1,513 as4 2,788 Appliance Mart........ 55 4% 15 337 1,088 569 Audio Emporium ...... 50 5 2 “85 455 474 170 50 % aa 3,026 Teo634 Part 3/ Evaluation and Control of the Sales Program Basler’s next step is the development of the necessary accounting statemer which will permit a detailed analysis of each sales representative's profitabili From there he will proceed to a customer profitability analysis for Charlie Lyon: customers. loa