Sam Brown Pte Ltd (SB) is a manufacture ready to eat meals in a central kitchen...

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Sam Brown Pte Ltd ("SB") is a manufacture ready to eat meals in a central kitchen and distributes to various convenience stores in Singapore. Its products are popular among Singaporean consumers. SB's income statement for the last year, 20x3 follows: ($'000) ($'000) Sales 10,000 Variable manufacturing cost (Ingredient and labour) Fixed manufacturing cost 1,500 2,000 Gross profit 6,500 Selling, general and administrative expenses Salaries and commissions 1,200 Advertising expense 500 Insurance expense 50 Depreciation 120 Fixed general and administrative expenses 364 2,234 4,266 156 4,110 411 Profit before interest and taxes Fixed interest expense Profit before taxes Tax expense Profit after tax 3,699 Due to higher costs in its supply chain, variable manufacturing costs and insurance are projected to increase by 25% in the coming year". Due to higher its supply chain costs, ingredients and insurance is projected to increase by 25% in the coming year. SB relies heavily on advertising to maintain its market share and expects advertising expense to increase by 50% from 20x3 levels. Salaries and commissions include variable sales commission of $600,000 paid to sales staff in 20x3. Sales commission rates will increase to 7% of sales in the coming year but sales salaries will remain unchanged for now. Recently, SB has been facing stiff competition from e-commerce sites selling similar products. Although BB has managed to maintain its sales for now, younger customers appear to like shopping via e-commerce systems. SB is considering joining an e-commerce sales platform to diversify its sales. The systems will cost a one-time joining fee of $380,000 to set up the system and yearly fees of $60,000 starting in the coming year. Convenience stall sales will maintain at 20x3 levels for the next 3 years, the e-commerce sales is expected to be around $500,000 in the first year and expects to grow by 180% year on year. If SB uses the system, a sales admin staff will be hired at a cost of $3,000 per month. All other manufacturing costs and admin costs remains the same as 20x3 levels unless otherwise stated that they will change. SB's central kitchen is has spare capacity to handle the increase in production. The CEO of SB, Andrew is confident that using the e-commerce platform will allow SB to maintain its current level of profits since the cost of the system is less that the cost of sales in 20x3. He has instructed the finance general manager to work out some analysis for the proposal quickly, so he can present to the Board for approval next week. Required: (a) Apply cost-volume-profit analysis to compute the breakeven point (in sales dollars) for the year 20x4 under the following scenarios: (i) Using sales staff only. (b) (c) (d) (ii) Using sales staff and the e-commerce platform. (8 marks) If SB continues use the e-commerce platform in 20x4, compute the estimated sales dollars (rounded to nearest dollar) that would be required to generate a net income before tax of 60% as with most players in the industry. (6 marks) Compute the sales (in nearest dollar) for net income before taxes at which point SB will be indifferent whether it join the e-commerce platform. Explain what your computations tell you. (12 marks) Compute the degree of operating leverage that SB would expect to have in 20x4 the following scenarios: (i) Using sales staff only. (e) (ii) Using sales staff and the e-commerce platform. Use operating income before taxes in the above computation. Round your answers to 2 decimal places. (7 marks) Using your computations from parts (a) to (d), provide your recommendation, with appropriate explanations, on why SB should/should not use the e-commerce system. (17 marks) Sam Brown Pte Ltd ("SB") is a manufacture ready to eat meals in a central kitchen and distributes to various convenience stores in Singapore. Its products are popular among Singaporean consumers. SB's income statement for the last year, 20x3 follows: ($'000) ($'000) Sales 10,000 Variable manufacturing cost (Ingredient and labour) Fixed manufacturing cost 1,500 2,000 Gross profit 6,500 Selling, general and administrative expenses Salaries and commissions 1,200 Advertising expense 500 Insurance expense 50 Depreciation 120 Fixed general and administrative expenses 364 2,234 4,266 156 4,110 411 Profit before interest and taxes Fixed interest expense Profit before taxes Tax expense Profit after tax 3,699 Due to higher costs in its supply chain, variable manufacturing costs and insurance are projected to increase by 25% in the coming year". Due to higher its supply chain costs, ingredients and insurance is projected to increase by 25% in the coming year. SB relies heavily on advertising to maintain its market share and expects advertising expense to increase by 50% from 20x3 levels. Salaries and commissions include variable sales commission of $600,000 paid to sales staff in 20x3. Sales commission rates will increase to 7% of sales in the coming year but sales salaries will remain unchanged for now. Recently, SB has been facing stiff competition from e-commerce sites selling similar products. Although BB has managed to maintain its sales for now, younger customers appear to like shopping via e-commerce systems. SB is considering joining an e-commerce sales platform to diversify its sales. The systems will cost a one-time joining fee of $380,000 to set up the system and yearly fees of $60,000 starting in the coming year. Convenience stall sales will maintain at 20x3 levels for the next 3 years, the e-commerce sales is expected to be around $500,000 in the first year and expects to grow by 180% year on year. If SB uses the system, a sales admin staff will be hired at a cost of $3,000 per month. All other manufacturing costs and admin costs remains the same as 20x3 levels unless otherwise stated that they will change. SB's central kitchen is has spare capacity to handle the increase in production. The CEO of SB, Andrew is confident that using the e-commerce platform will allow SB to maintain its current level of profits since the cost of the system is less that the cost of sales in 20x3. He has instructed the finance general manager to work out some analysis for the proposal quickly, so he can present to the Board for approval next week. Required: (a) Apply cost-volume-profit analysis to compute the breakeven point (in sales dollars) for the year 20x4 under the following scenarios: (i) Using sales staff only. (b) (c) (d) (ii) Using sales staff and the e-commerce platform. (8 marks) If SB continues use the e-commerce platform in 20x4, compute the estimated sales dollars (rounded to nearest dollar) that would be required to generate a net income before tax of 60% as with most players in the industry. (6 marks) Compute the sales (in nearest dollar) for net income before taxes at which point SB will be indifferent whether it join the e-commerce platform. Explain what your computations tell you. (12 marks) Compute the degree of operating leverage that SB would expect to have in 20x4 the following scenarios: (i) Using sales staff only. (e) (ii) Using sales staff and the e-commerce platform. Use operating income before taxes in the above computation. Round your answers to 2 decimal places. (7 marks) Using your computations from parts (a) to (d), provide your recommendation, with appropriate explanations, on why SB should/should not use the e-commerce system. (17 marks)