QUESTION 4

1. SPI-W Inc. manufactures front fenders that are sold by brokers. The brokers are paid a commission of 18% of sales. The partial statement of earnings for the year ended September 30, 2021 is as follows:

   SPI-W Inc.
   Statement of Earnings
   September 30, 2021
   Sales					$26,000,000
   Cost of Goods Sold
   Variable			$11,700,000
   Fixed			2,870,000		14,570,000
   Gross Margin					$11,430,000
   Expenses
   Commissions			4,680,000
   Fixed Costs			3,420,000		8,100,000
   Operating Income					$3,330,000

   SPI-W Inc. has had several meetings and the CFO, Billy Know it All, suggests that the company consider hiring its own staff to replace the brokers. The company will pay its own staff a commission of 10% and incur fixed costs of $2,080,000.

   1. Calculate SPI-W Inc.s breakeven point in sales dollars for the year 2021, as it is currently with the brokers. (8 marks)
   2. Calculate SPI-W Inc.s breakeven point in sales dollars for the year 2021, if the company had its own sales people. (8 marks)
   3. Using operating leverage at the current sales, consider i) current brokers. ii) own staff. Describe the advantage and disadvantages of each scenario. (10 marks)
   4. If SPI-W Inc. considers increasing the commission for their own proposed staff to 15%, keeping all other costs the same, how much revenue (in dollars) would SPI-W Inc. need to generate to earn the same operating income it did in 2020? (8 marks)