Problem 3.6 (10 Marks) You are the new Marketing VP for Watermetco, a company that sells two items: meters manufactured by a major supplier (an OEM, or Original Equipment Manufacturing) and meter servicing and calibration. These business lines are fairly independent in that you service all kinds of meters, not just the ones that you sell, and you sell meters to customers who do their own service. Hence the two lines of business are not linked, i.e., you do not need to sell a meter to get the service work for the meter. Your customers are water utilities. These utilities could buy the meters directly from the manufacturer, but they place orders through you for convenience. You have the summary shown in the following table for the current performance of the US region from your financial contact within the company. Meter Sales Meter Service Total Revenue 2,100,000 2,100,000 Product Sales Service Sales Parts Sales for Service 672,000 672,000 39,000 39,000 Subtotal 2,100,000 711,000 2,811,000 Percent of Total (%) 74.7 25.3 100 Direct Costs Cost of Materials 1,942,000 36,500 1,978,500 71,800 213,600 285,400 Direct Salaries and Fringe per Product (includes sales costs) WCB and Other Direct Employee 700 1,100 1,800 Costs 2,800 2,800 Government Sealing Fees Freight 18,600 18,600 Direct Sales costs (travel, etc.) 10,000 3,400 13,400 Small Tools and Supplies 9,500 9,500 Subtotal 2,024,500 285,500 2,310,000 75,500 425,500 501,000 Contribution Margin CM (%) 3.6 59.8 17.8 General and Admin Costs 62,000 65,000 6,000 20,700 12,000 96,000 Travel and Accommodation Advertising and Promotion Vehicle Lease Business and Property Tax Legal and Professional Fees Office Wages and Salaries Office Fringe Benefits Lawn, Snow, Cleaning and Security Utilities Printing and Stationary Subscriptions Telephone 11,900 6,700 13,000 7,000 1,200 12,800 Subtotal 314,300 Net Income 186,700 The president of the company tells you that as part of the overall strategy of the company, you are to ensure an expansion of activity in the existing US region with the goal of generating more net income. As a result, you are going to hire a sales leader. Based on the financial statement, explain in one or two paragraphs what you will tell the new sales person to emphasize and why. Make sure to include the following: 1. What is the approximate cost of the extra staff person (the sales leader) in terms of salary and likely level of expense? 2. What percentage increase in meter sale and in meter service would be necessary to recover the cost of this extra staff? Problem 3.6 (10 Marks) You are the new Marketing VP for Watermetco, a company that sells two items: meters manufactured by a major supplier (an OEM, or Original Equipment Manufacturing) and meter servicing and calibration. These business lines are fairly independent in that you service all kinds of meters, not just the ones that you sell, and you sell meters to customers who do their own service. Hence the two lines of business are not linked, i.e., you do not need to sell a meter to get the service work for the meter. Your customers are water utilities. These utilities could buy the meters directly from the manufacturer, but they place orders through you for convenience. You have the summary shown in the following table for the current performance of the US region from your financial contact within the company. Meter Sales Meter Service Total Revenue 2,100,000 2,100,000 Product Sales Service Sales Parts Sales for Service 672,000 672,000 39,000 39,000 Subtotal 2,100,000 711,000 2,811,000 Percent of Total (%) 74.7 25.3 100 Direct Costs Cost of Materials 1,942,000 36,500 1,978,500 71,800 213,600 285,400 Direct Salaries and Fringe per Product (includes sales costs) WCB and Other Direct Employee 700 1,100 1,800 Costs 2,800 2,800 Government Sealing Fees Freight 18,600 18,600 Direct Sales costs (travel, etc.) 10,000 3,400 13,400 Small Tools and Supplies 9,500 9,500 Subtotal 2,024,500 285,500 2,310,000 75,500 425,500 501,000 Contribution Margin CM (%) 3.6 59.8 17.8 General and Admin Costs 62,000 65,000 6,000 20,700 12,000 96,000 Travel and Accommodation Advertising and Promotion Vehicle Lease Business and Property Tax Legal and Professional Fees Office Wages and Salaries Office Fringe Benefits Lawn, Snow, Cleaning and Security Utilities Printing and Stationary Subscriptions Telephone 11,900 6,700 13,000 7,000 1,200 12,800 Subtotal 314,300 Net Income 186,700 The president of the company tells you that as part of the overall strategy of the company, you are to ensure an expansion of activity in the existing US region with the goal of generating more net income. As a result, you are going to hire a sales leader. Based on the financial statement, explain in one or two paragraphs what you will tell the new sales person to emphasize and why. Make sure to include the following: 1. What is the approximate cost of the extra staff person (the sales leader) in terms of salary and likely level of expense? 2. What percentage increase in meter sale and in meter service would be necessary to recover the cost of this extra staff
