Omega Medical Supplies Pte Ltd (OMS) is a small but growing manufacturer of medical equipment. Due to its small set-up, the company does not have a sales force of its own, but relies entirely on independent sales agents to market its products. The independent sales agents are paid a commission of 15% of sales. This is reflected in the budget for the new financial year ending 31 December 2022, as follows: ($'000) Sales Cost of goods sold Variable Fixed Gross profit Selling, general and administrative expenses Agents' commissions Fixed advertising expenses 7,200 2,340 2,400 120 (S'000) 16,000 9,540 6,460
Omega Medical Supplies Pte Ltd (OMS) is a small but growing manufacturer of medical equipment. Due to its small set-up, the company does not have a sales force of its own, but relies entirely on independent sales agents to market its products. The independent sales agents are paid a commission of 15% of sales. This is reflected in the budget for the new financial year ending 31 December 2022, as follows: ($'000) Sales Cost of goods sold Variable Fixed Gross profit Selling, general and administrative expenses Agents' commissions Fixed advertising expenses 7,200 2,340 2,400 120 (S'000) 16,000 9,540 6,460
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Compute the breakeven point in sales dollars for the financial year ending 31 December 2022 under the following scenarios:
(i) Using independent sales agents’ commission at 15%.
(ii) Using independent sales agents’ commission at 20%.
(iii) Using the company’s own hired sales team.
![Subsequent to the approval of the budgets for the year ending 31 December 2022, OMS was
informed that independent sales agents demanded for an increase in commission rate to 20%
for 2022 to cover for advertising, travel and other promotional costs. This effectively rendered
the approved budgets invalid.
The founder of OMS, Denzel was indignant that they had to be subjected to the unfounded
request by the independent sales agents, and commissioned an urgent study of hiring its own
sales team.
After a detailed analysis, the financial controller proposed to engage the company's own sales
team, providing a 7.5% sales commission and a base salary, which is comparable to market
rates. However, the company will have to handle all advertising and promotional activities
internally.
Under the new proposal, fixed costs would increase by $2,400,000 (see below for details), but
this would be better than having to pay the independent sales agents a commission of
$3,200,000 (20% of $16,000,000).
($'000)
Salaries of sales team
Sales manager
Sales persons
Travel and entertainment
100
600
400
Advertising and promotion
1,300
2,400
Denzel was very pleased with the proposal, commenting that the $2,400,000 is exactly the same
as what the company would have paid under the 15% commission rate. In addition, there would
be additional savings of $75,000 from auditing fees paid to verify the agents' sales reports. In
other words, general and admin expenses will decrease by $75,000. He has asked the financial
controller to tidy up the proposal quickly and get the new budget approved.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0ed910c2-ce17-44bc-a678-6e4f25cfc26f%2Fa20a8d27-60bc-4e28-a7ec-7fe2c374b014%2Fvz7unv_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Subsequent to the approval of the budgets for the year ending 31 December 2022, OMS was
informed that independent sales agents demanded for an increase in commission rate to 20%
for 2022 to cover for advertising, travel and other promotional costs. This effectively rendered
the approved budgets invalid.
The founder of OMS, Denzel was indignant that they had to be subjected to the unfounded
request by the independent sales agents, and commissioned an urgent study of hiring its own
sales team.
After a detailed analysis, the financial controller proposed to engage the company's own sales
team, providing a 7.5% sales commission and a base salary, which is comparable to market
rates. However, the company will have to handle all advertising and promotional activities
internally.
Under the new proposal, fixed costs would increase by $2,400,000 (see below for details), but
this would be better than having to pay the independent sales agents a commission of
$3,200,000 (20% of $16,000,000).
($'000)
Salaries of sales team
Sales manager
Sales persons
Travel and entertainment
100
600
400
Advertising and promotion
1,300
2,400
Denzel was very pleased with the proposal, commenting that the $2,400,000 is exactly the same
as what the company would have paid under the 15% commission rate. In addition, there would
be additional savings of $75,000 from auditing fees paid to verify the agents' sales reports. In
other words, general and admin expenses will decrease by $75,000. He has asked the financial
controller to tidy up the proposal quickly and get the new budget approved.
![Omega Medical Supplies Pte Ltd (OMS) is a small but growing manufacturer of medical
equipment. Due to its small set-up, the company does not have a sales force of its own, but
relies entirely on independent sales agents to market its products.
The independent sales agents are paid a commission of 15% of sales. This is reflected in the
budget for the new financial year ending 31 December 2022, as follows:
(S'000)
(S'000)
16,000
Sales
Cost of goods sold
Variable
Fixed
7,200
9,540
6,460
2.340
Gross profit
Selling, general and administrative expenses
Agents' commissions
Fixed advertising expenses
Fixed general and administrative expenses
Profit before interest and taxes
2,400
120
1,800
4,320
2,140
Fixed interest expense
Profit before taxes
540
1,600
Тах еxpense
272
Profit after tax
1,328](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0ed910c2-ce17-44bc-a678-6e4f25cfc26f%2Fa20a8d27-60bc-4e28-a7ec-7fe2c374b014%2Fki8ch1o_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Omega Medical Supplies Pte Ltd (OMS) is a small but growing manufacturer of medical
equipment. Due to its small set-up, the company does not have a sales force of its own, but
relies entirely on independent sales agents to market its products.
The independent sales agents are paid a commission of 15% of sales. This is reflected in the
budget for the new financial year ending 31 December 2022, as follows:
(S'000)
(S'000)
16,000
Sales
Cost of goods sold
Variable
Fixed
7,200
9,540
6,460
2.340
Gross profit
Selling, general and administrative expenses
Agents' commissions
Fixed advertising expenses
Fixed general and administrative expenses
Profit before interest and taxes
2,400
120
1,800
4,320
2,140
Fixed interest expense
Profit before taxes
540
1,600
Тах еxpense
272
Profit after tax
1,328
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 2 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
![FINANCIAL ACCOUNTING](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781259964947/9781259964947_smallCoverImage.jpg)
![Accounting](https://www.bartleby.com/isbn_cover_images/9781337272094/9781337272094_smallCoverImage.gif)
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
![Accounting Information Systems](https://www.bartleby.com/isbn_cover_images/9781337619202/9781337619202_smallCoverImage.gif)
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
![FINANCIAL ACCOUNTING](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781259964947/9781259964947_smallCoverImage.jpg)
![Accounting](https://www.bartleby.com/isbn_cover_images/9781337272094/9781337272094_smallCoverImage.gif)
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
![Accounting Information Systems](https://www.bartleby.com/isbn_cover_images/9781337619202/9781337619202_smallCoverImage.gif)
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
![Horngren's Cost Accounting: A Managerial Emphasis…](https://www.bartleby.com/isbn_cover_images/9780134475585/9780134475585_smallCoverImage.gif)
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
![Intermediate Accounting](https://www.bartleby.com/isbn_cover_images/9781259722660/9781259722660_smallCoverImage.gif)
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
![Financial and Managerial Accounting](https://www.bartleby.com/isbn_cover_images/9781259726705/9781259726705_smallCoverImage.gif)
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education