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: ($'000) Sales Cost of goods sold Variable Fixed Gross profit Selling, general and administrative expenses Agents' commissions Fixed advertising expenses Fixed general and administrative expenses Profit before interest and taxes Fixed interest expense Profit before taxes Tax expense Profit after tax 7,200 2,340 2,400 120 1,800 ($'000) 16,000 9,540 6,460 4,320 2,140 540 1,600 272 1,328
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Compute the degree of operating leverage that OMS would expect to have as at 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.
Use operating income before taxes in the above computation.
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