Cortez Enterprises is studying the addition of a new product that would have an expected selling price
Question:
Cortez Enterprises is studying the addition of a new product that would have an expected selling price of RM180 and expected variable cost of RM120. Anticipated demand is 9,000 units. A new salesperson must be hired because the company's current sales force is working at capacity. Two compensation plans are under consideration:
Plan 1: An annual salary of RM38,000 plus 10% commission based on gross sales dollars
Plan 2: An annual salary of RM180,000 and no commission
Required:
(a) Explain the term "operating leverage".
(b) Calculate the contribution margin and profit (income) of the two plans at 9,000 units.
(c) Compute the degree of operating leverage of the two plans at 9,000 units. Which of the two plans is more highly leveraged? Provide relevant explanation to support your answer.
(d) Assume that a general economic downturn occurred during year 2, with product demand falling from 9,000 to 7,200 units. By using the degree of operating leverage, determine and show which plan would produce a larger percentage decrease in income.
Expert Answer:
