AI Excellent manufactures computer graphics hardware. The company sells its product through a network of sales agents. The agents are currently paid a 10% commission on sales. The following table shows the financial results of AI Excellents operations for 2020: Sales revenue RM1,200,000 Less: Cost of goods sold Variable 420,000 Fixed 180,000 Gross profit 600,000 Less: Operating costs Sales commissions 120,000 Fixed administrative costs 300,000 Operating income RM180,000 Sales volume 2,000 units

For the upcoming year, the sales agents are proposing a 5% increase in their commission. The president of AI Excellent is very unhappy with the proposal, We are barely making a profit! Should we hire our own salespersons then? The president has asked the accountant to gather information on the costs associated with hiring own salespersons in place of the sales agents. The accountant estimates that the company needs to hire 8 salespersons to cover the market area, and a sales manager to coach the salespersons. The company also needs to incur advertising cost if the salespersons are hired. The estimated costs associated with the new plan follow: Monthly salary: Salesperson Sales manager

RM1,200 per salesperson RM4,000 Annual advertising cost RM19,800

Required: a. Each question is to be treated independently. Calculate the breakeven point in units and sales (RM) for the upcoming year, if: i. the company accepts and pays 15% commission to sales agents. ii. the company hires its own salespersons.

(7 marks) b. Suppose the company accepts and pays 15% commission to sales agents. Without showing any computation, would the company gain a profit or incur a loss if 1,800 units of computer graphics hardware is sold in the upcoming year? Explain.

(2 marks) c. Suppose the company hires its own salespersons. Calculate the sales revenue needed to earn a target operating income of RM250,000.

(3 marks)

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d. Refer to the original data. At what level of sales revenue will the company earn the same operating income under either option?

(4 marks) e. Refer to the original data. The company expects that sales volume will increase by 5% in the upcoming year. Calculate the degree of operating leverage for the two options and explain your answer.

(7 marks)

f. List TWO ways to reduce breakeven points.