Question $2$

A$)$ Mimi Enterprise is studying the addition of a new product that would have an expected selling price of RM$180$ and expected variable cost of RM$120.$ Anticipated demand is $9,000$ units.

A new salesperson must be hired because the company's current sales forces are working at full capacity. Two compensation plans are under consideration:

Plan $1$: An annual salary of RM $38,000$ plus $10\%$ commission based on gross sales dollars

Plan $2$: An annual salary of RM $180,000$ and no commission

Required:

$($i$)$ What is meant by the term "operating leverage"?

$(2$ marks$)$

$($ii$)$ Calculate the contribution margin and income of the two plans at $9,000$ units

$(6$ marks$)$

$($iii$)$ Compute the operating leverage factor of the two plans at $9,000$ units. Which of the two plans is more highly leveraged? And explain why?

$(4$ marks$)$