Question 3 Sleep: Medical Pte Ltd {SMPL) manufactures a range of medical instruments for patients with respiratory problems. Currently, the company only supplies to the Singapore and Malaysian markets through a network of sales agents. SMPL has just completed the budget for the new nancial year ending 31 December 202x. The budgeted income statement is shown as follows: (5'000) {3'000} Sales 28,500.00 Cost of goods sold Variable 12,800.00 Fixed 3,500.00 16,300.00 Gross prot 12,200.00 Selling, general and administrative expenses Commissions 5,130.00 Fixed advertising expenses 770.00 Fixed general and administrative expenses 2,150.00 8,050.00 Prot before interest and taxes 4,150.00 Fixed interest expense 700.00 Prot before taxes 3,450.00 Tax expense 862.50 Prot after taxes 2,582.50 The xed component of cost of goods sold is the total xed manufacturing cost expected to be incun'ed for 202x. The commissions vary proportionately to sales revenue. Subsequent to the approval of the budgets for the year ending 31 December 202K, the sales agents requested for an increase in commission rate oor 18% to 23%. The CEO had previously lamented on the high commission rates paid to the sales agents. This last minute tactic prompted the CEO to conduct a study to investigate the possibility of hiring SMPL's own sales team. The following estimates have been gathered with respect to the altemative of SMPL hiring its own sales team: II Eight sales executives at an average annual salary (inclusive of staff related benets} of $80,000 each would be needed to cover the current market area. In addition, these executives would be paid a commission rate of 10% of sales. I Entertainment and transport costs of $600,000 would need to be incurred. II A. sales manager would be hired to oversee the executives at an annual salary of$150,000. I Additional advertising expenses of $500,000 would be incurred. Required: (at) (b) (c) (d) Solve for the estimated breakeyen point in sales dollars for the nancial year ending 3 1 December 202x, if SMPL hired its own sales team instead of using its current network of sales agents. (8 marks) If SMPL continues to sell through its network of sales agents and pays the higher commission rate {23% instead of 13%}, compute the estimated sales dollars that would be required to generate the level of prot before taxes as projected in the budgeted income statement. (4 marks) There are a number of key assumptions underlying the validity of using a cost- volume-prot model. List live (2) assumptions that are necessary to your analysis of this case. (4 marks) Compute the sales dollars for which SMPL will be indifferent as to either accepting the current sales agents' demand for increase in commission or adopting the proposed change to hire its own sales team. Which option would you recommend SMPL adopt? Explain. (10 marks)
