Question

Required information

Skip to question

[The following information applies to the questions displayed below.]

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.

Plan B: An annual salary of $66,000 and no commission.

Consolidated Industries will purchase the valve for $50 and sell it for $80. Anticipated demand during the first year is 6,000 units. (In the following requirements, ignore income taxes.)

3-a. Compute the operating leverage factor of both plans at the anticipated demand of 6,000 units. (Round your answers to 2 decimal places.)

Answer 1

.		Plan A		Plan B
Sales revenue	80*6000	480000	80*6000	480000
Variable cost of goods sold (purchase peice)	50*6000	300000	50*6000	300000
Variable Sales commission	480000*10%	48000
Contribution maegin		132000		180000
Fixed cost:
Annual salary		22000		66000
Operating income		110000		114000
Operating leverage factor =	132000/110000	1.20	180000/114000	1.58
Contribution margin/operating income

> A firm with high fixed expenses and low variable expenses has high operating leverage factor; whereas a company with low fixed expenses

and high variable expenses has low operating leverage factor. a higher degree of operating leverage creates added sensitivity to changes in sales reveue and profit.