HNH Tech, Inc. is studying the addition of a new valve to its product line. The...

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HNH Tech, 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 HNH Tech's current sales force is working at capacity. Two compensation plans are under consideration: Plan A: An annual salary of Rs.33,000 plus a 10% commission based on gross dollar sales. Plan B: An annual salary of Rs.99.000 and no commission. Required: 1. Compute HNH Tech's break-even point for Plan A and Plan B. 2. What is meant by the term operating leverage? 3. Analyze the cost structures of both plans at the anticipated demand of 6,000 units. Which of the two plans is more highly leveraged? Why? 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 HNH Tech 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? HNH Tech, 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 HNH Tech's current sales force is working at capacity. Two compensation plans are under consideration: Plan A: An annual salary of Rs.33,000 plus a 10% commission based on gross dollar sales. Plan B: An annual salary of Rs.99.000 and no commission. Required: 1. Compute HNH Tech's break-even point for Plan A and Plan B. 2. What is meant by the term operating leverage? 3. Analyze the cost structures of both plans at the anticipated demand of 6,000 units. Which of the two plans is more highly leveraged? Why? 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 HNH Tech 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?

Answer rating: 100% (QA)

WORKINGS PART 1 1 The breakeven point for Plan A is Rs1200000 and the breakeven point for Plan B is Rs2500000 To calculate the breakeven point for Plan A we need to find the point where total revenue ... View the full answer