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 Product Sales Service Sales Parts Sales for Service 672,000 2,100,000 672,000 39,000 39,000 2,100,000 2,811,000 Subtotal Percent of Total (%) 711,000 25.3 74.7 100 36,500 1,978,500 1,942,000 71,800 213,600 285,400 Direct Costs Cost of Materials Direct Salaries and Fringe per Product (includes sales costs) WCB and Other Direct Employee Costs Government Sealing Fees Freight 700 1,100 1,800 2,800 2,800 18,600 18,600 10,000 Direct Sales costs (travel, etc.) Small Tools and Supplies 3,400 9,500 13,400 9,500 Subtotal 2,024,500 285,500 2,310,000 425,500 Contribution Margin CM (%) 75,500 3.6 501,000 17.8 59.8 62,000 General and Admin Costs 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 65,000 6,000 20,700 12,000 96,000 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. m 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 3.8 (10 Marks) The table shows compressed income statement of a company. Revenue Allowance for Bad Debt Net Revenue Past Year (S) 18,232,000 182,000 18,050,000 Next Year ($) 18,232,000 182,000 18,050,000 COGS 12,179,000 CM 12,179,000 5,871,000 32.2 5,871,000 CM (%) 32.2 2,796,000 SG&A All Items Except Depreciation Depreciation 2,796,000 2,430,000 645,000 Operating Income 400,000 0 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 Product Sales Service Sales Parts Sales for Service 672,000 2,100,000 672,000 39,000 39,000 2,100,000 2,811,000 Subtotal Percent of Total (%) 711,000 25.3 74.7 100 36,500 1,978,500 1,942,000 71,800 213,600 285,400 Direct Costs Cost of Materials Direct Salaries and Fringe per Product (includes sales costs) WCB and Other Direct Employee Costs Government Sealing Fees Freight 700 1,100 1,800 2,800 2,800 18,600 18,600 10,000 Direct Sales costs (travel, etc.) Small Tools and Supplies 3,400 9,500 13,400 9,500 Subtotal 2,024,500 285,500 2,310,000 425,500 Contribution Margin CM (%) 75,500 3.6 501,000 17.8 59.8 62,000 General and Admin Costs 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 65,000 6,000 20,700 12,000 96,000 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. m 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 3.8 (10 Marks) The table shows compressed income statement of a company. Revenue Allowance for Bad Debt Net Revenue Past Year (S) 18,232,000 182,000 18,050,000 Next Year ($) 18,232,000 182,000 18,050,000 COGS 12,179,000 CM 12,179,000 5,871,000 32.2 5,871,000 CM (%) 32.2 2,796,000 SG&A All Items Except Depreciation Depreciation 2,796,000 2,430,000 645,000 Operating Income 400,000 0