Explain the basis of Polly Xu’s argument, Calculate the Contribution Margin Ratio under each altenat

Nardeb Company is a software producer and sales company. Currently, it pays all sales staff on a fixed base salary. Recently, management has been considering switching sales staff across to an incentive-based reward system. Nardeb’s chief accountant Polly Xu has prepared some summarised numbers (see below) for senior management to consider. Michael Day comments that he cannot see the difference, as the sales level and profit are unchanged. Xu argues that it is the difference in cost structure that matters. She argues that the entity is better off staying with the current structure, because the increase in profit is greater when sales levels increase than it would be with the incentive rewards. With fixed rewards With incentive rewards Sales $2,500,000 $2,500,000 Variable costs 1,500,000 2,000,000 Contribution margin 1,000,000 500,000 Fixed costs 750,000 250,000 Profit $250,000 $250,000 Required (group) a. Explain the basis of Polly Xu’s argument. b. Calculate the Contribution Margin Ratio under each alternative. c. If sales were to increase by 10 per cent, which alternative would produce the highest increase in profit? d. Prepare an income statement for each alternative (under the assumption of the increased sales in c. above). Required (your individual response) a. Briefly evaluate the contributions of Polly and Michael in the above situation, and then make your recommendations on the incentive rewards proposal. Are there any other factors that need to be considered in making such a management decision?