question archive Megah Holding is studying the addition of a new valve to its product line
Megah Holding is studying the addition of a new valve to its product line
Subject:BusinessPrice: Bought3
Megah Holding 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 Megah Holding's current sales force is working at capacity. Two compensation plans are under consideration: Plan A: An annual salary of RM22,000 plus a 10% commission based on gross ringgit sales. Plan B: An annual salary of RM66,000 and no commission. Megah Holding will purchase the valve for RM50 and sell it for RM80. Anticipated demand during the first year is 6,000 units. Required: 1. Compute the break-even point in units for Plan A and Plan B. 2. What is meant by the term operating leverage? 3. Analyse the cost structures of both plans at the anticipated demand of 6,000 units. Which of the two plans has a higher operating leverage factor? 4. Assume that a general economic downturn occurred during year 2, with product demand falling from 6,000 to 5,000 units. Determine the percentage decrease in company net income if Megah Holding had adopted Plan A. 5. Repeat requirement 4 for Plan B. Compare Plan A and Plan B and explain a major factor that underlies any resulting differences. 6. Briefly discuss the likely profitability impact of an economic recession for highly automated manufacturers. What can you say about the risk associated with these firms?
