Clarkson Enterprises Is Studying the Addition of a New Product

question 79

Essay

Clarkson Enterprises is studying the addition of a new product that would have an expected selling price of $180 and expected variable cost of $120. Anticipated demand is 9,000 units.
A new salesperson must be hired because the company's current sales force is working at capacity. Two compensation plans are under consideration:
Plan 1: An annual salary of $38,000 plus 10% commission based on gross sales dollars
Plan 2: An annual salary of $180,000 and no commission
A. What is meant by the term "operating leverage"?
B. Calculate the contribution margin and income of the two plans at 9,000 units.
C. Compute the operating leverage factor of the two plans at 9,000 units. Which of the two plans is more highly leveraged? Why?
D. Assume that a general economic downturn occurred during year no. 2, with product demand falling from 9,000 to 7,200 units. By using the operating leverage factors, determine and show which plan would produce a larger percentage decrease in income.

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Definitions:

Close Friendship

Close friendship is a deeply personal bond characterized by mutual affection, trust, and support between individuals.

Adaptation-Level Phenomenon

A psychological principle stating that people adapt to a certain level of stimulation or achievement, after which further improvements or increases are measured relative to this new baseline.

Relative Deprivation

A perception or feeling that one is worse off relative to those with whom one compares oneself.

Promotion

The act of advancing someone to a higher position or rank, often associated with increased responsibilities and benefits.