Question

In: Accounting

Enak Enterprise is studying the addition of a new product that would have an expected selling...

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)

Solutions

Expert Solution

A.

.


Plan 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 A

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 A

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

ekkarill92 answered 2 years ago
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