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 1 year ago
Next > < Previous

Related Solutions

Consolidated Industries is studying the addition of a new valve to its product line. The valve...
Consolidated Industries is studying the addition of a new valve to its product line. The valve would be used by manufacturers of irrigation equipment. The company anticipates starting with a relatively low sales volume and then boosting demand over the next several years. A new salesperson must be hired because Consolidated’s current sales force is working at capacity. Two compensation plans are under consideration: Plan A: An annual salary of $22,000 plus a 10% commission based on gross dollar sales....
PneumoTech, Inc. is studying the addition of a new valve to its product line. The valve...
PneumoTech, Inc. is studying the addition of a new valve to its product line. The valve would be used by manufacturers of pneumatic equipment. The company anticipates starting with a relatively low sales volume and then boosting demand over the next several years. A new salesperson must be hired because PneumoTech's current sales force is working at capacity. Two compensation plans are under consideration:            Plan A:    An annual salary of $33,000 plus a 10% commission based on gross dollar...
4) In addition to studying the mean monthly sales of the product, the analyst wishes to...
4) In addition to studying the mean monthly sales of the product, the analyst wishes to study the proportion of stores that have experienced a return rate of at least 20% of the product sold at its store within 90 days of the purchase of the item. Store policy requires any return of the shirt to be done at the store at which the shirt was purchased. What minimum numbers of stores need to be selected to estimate the desired...
Tampa Enterprises is considering the addition of a new product line.  The firm would not need additional...
Tampa Enterprises is considering the addition of a new product line.  The firm would not need additional factory space, but it would require the purchase of $2.45 million of equipment installed.  The equipment would be depreciated using a 7-year accelerated depreciation schedule.  Additional inventory of 13% of the projected increase in next year’s sales would be necessary prior to each year of operation, but the entire value will be recovered at the end of the project.  The firm expects to sell 340,000 units during...
Cleveland Enterprises is considering the addition of a new product line.  The firm would not need additional...
Cleveland Enterprises is considering the addition of a new product line.  The firm would not need additional factory space, but it would require the purchase of $2.45 million of equipment installed.  The equipment would be depreciated using a 7-year accelerated depreciation schedule.  Additional inventory of 13% of the projected increase in next year’s sales would be necessary prior to each year of operation, but the entire value will be recovered at the end of the project.  The firm expects to sell 340,000 units during...
Cleveland Enterprises is considering the addition of a new product line.  The firm would not need additional...
Cleveland Enterprises is considering the addition of a new product line.  The firm would not need additional factory space, but it would require the purchase of $2.45 million of equipment installed.  The equipment would be depreciated using a 7-year accelerated depreciation schedule.  Additional inventory of 13% of the projected increase in next year’s sales would be necessary prior to each year of operation, but the entire value will be recovered at the end of the project.  The firm expects to sell 340,000 units during...
Cleveland Enterprises is considering the addition of a new product line.  The firm would not need additional...
Cleveland Enterprises is considering the addition of a new product line.  The firm would not need additional factory space, but it would require the purchase of $2.45 million of equipment installed.  The equipment would be depreciated using a 7-year accelerated depreciation schedule.  Additional inventory of 13% of the projected increase in next year’s sales would be necessary prior to each year of operation, but the entire value will be recovered at the end of the project.  The firm expects to sell 340,000 units during...
Cleveland Enterprises is considering the addition of a new product line.  The firm would not need additional...
Cleveland Enterprises is considering the addition of a new product line.  The firm would not need additional factory space, but it would require the purchase of $2.45 million of equipment installed.  The equipment would be depreciated using a 7-year accelerated depreciation schedule.  Additional inventory of 13% of the projected increase in next year’s sales would be necessary prior to each year of operation, but the entire value will be recovered at the end of the project.  The firm expects to sell 340,000 units during...
Zachary Company is considering the addition of a new product to its cosmetics line. The company...
Zachary Company is considering the addition of a new product to its cosmetics line. The company has three distinctly different options: a skin cream, a bath oil, or a hair coloring gel. Relevant information and budgeted annual income statements for each of the products follow. Relevant Information Skin Cream Bath Oil Color Gel Budgeted sales in units (a) 140,000 220,000 100,000 Expected sales price (b) $ 7 $ 7 $ 15 Variable costs per unit (c) $ 2 $ 4...
Walton Company is considering the addition of a new product to its cosmetics line. The company...
Walton Company is considering the addition of a new product to its cosmetics line. The company has three distinctly different options: a skin cream, a bath oil, or a hair coloring gel. Relevant information and budgeted annual income statements for each of the products follow. Relevant Information Skin Cream Bath Oil Color Gel Budgeted sales in units (a) 138,000 218,000 98,000 Expected sales price (b) $ 10 $ 9 $ 16 Variable costs per unit (c) $ 2 $ 4...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT