In: Accounting
Enak Enterprise is studying the addition of a new product that
would have an expected selling price of RM90 and expected variable
product cost of RM50 per unit. Anticipated demand is 8,000 units. A
new salesperson must be hired because the company's current sales
force is working at full capacity. Two compensation plans are under
consideration:
Plan A: An annual salary of RM40,000 plus 5% commission based on
the amount of sales.
Plan B: An annual salary of RM50,000 and no sales commission.
Required:
a) Calculate the contribution margin and net profit of
the two plans at 6,000 units.
b) Calculate break even point (in unit and in sales)
and margin of safety (in unit) of the two plans. Advice to the
management which plan to be adopted.
c) Suppose management plan to spend RM35,000 on
advertising programme of the two plans, how many additional units
must the company sell to justify this additional expenditure?
(Total:20 Marks)
A.
. |
|
Plan B |
Units |
6000 |
6000 |
Sales revenue (price RM 90) |
540000 |
540000 |
Variable product cost (50 * 6000 ) |
300000 |
300000 |
Variable sales commission 5% on sales |
27000 |
|
Contribution Margin |
213000 |
240000 |
Fixed cost - sales salary |
40000 |
50000 |
Profit |
173000 |
190000 |
B.
. |
|
Plan B |
Fixed cost |
40000 |
50000 |
Contribution Margin per units = Contribution Margin / number of units |
213000 / 6000 = 35.5 |
240000/ 6000 = 40 |
Contribution Margin ratio = Contribution Margin per units / selling price |
35.5 / 90 = 0.3944 or 39.44% |
40 / 90 = 0.4444 or 44.44% |
Break-even point in units = Fixed cost / Contribution Margin per units |
40000 /35.5 = 1127 units |
50000 / 40 = 1250 |
Break-even point in sales = Fixed cost / Contribution Margin ratio |
40000 / 39.44% = RM 101420 |
50000 / 44.44% =RM 112511 |
Margin of safety (I units ) = Actual sales units - Break-even point in units |
6000 - 1127 = 4873 units |
6000 - 1250 = 4750 |
Based on answer in B, Plan A is better to adopt, because it has lower units needed to break-even,its margin of safety is higher.
C.
Additional units needed = additional advertising cost / Contribution Margin per units
. |
|
Plan B |
Additional advertising cost |
35000 |
35000 |
Contribution Margin per units = |
= 35.5 |
= 40 |
Additional units needed |
35000 / 35.5 = 986 units |
35000 / 40 = 875 units |