Question

Question 4

Kia Soo Pte Ltd (KS) produces small tablets computers. It just hired its third product manager in three years. All the previous managers had quit because they could not get sales to go above the break-even point. This is despite the fact that sales had increased 5% in each of the past three years. The company has been operating at about 60% of plant capacity. The small tablets industry is growing, so increasing sales is not unrealistic.

Mr Easy took the job as product manager with a very attractive salary package. After interviewing for the position, he had proposed a salary and bonus package that would give him a very small salary but a large bonus if he took KS’s absorption costing operating income above the break-even point during his very first year at KS.

Required:

Explain what Mr Easy could have in mind for increasing the company's operating income above break-even point so quickly. Explain if you think KS would be better or worse off if Mr Easy’s plan succeeded.

(14 marks)

Answer 1

Mr Easy could have in his mind to increase sales at current fixed cost. All the previous managers were able to increase the sales at an increased fixed cost, thats why sales were increasing only till break even point. But, now Mr Easy can think to increase sales proportion if there is increased fixed cost.
If the plan of Mr Easy is on above parameters, then it will surely benefit KS.

Mr Easy can also ask the management to stop the expansion for a while as it is not taking the sales up from the break even point. There is no proportionate increase in the sales. So, Mr Easy can ask the management to stop the expansion and so the fixed cost will not increase, Mr Easy will try to increase the sales from break even point without increased fixed cost. This will be beneficial to KS as its profit will increase as sales will go beyond break even point.