Superior Real Estate Agency has opened an office in Collins Street Melbourne. The average monthly property sales is $900,000 and the Estate agent generates its revenue via charging a commission (agency revenue) of 6.0% of the gross property sales. Fixed monthly costs are office rent ($4,000), depreciation of office furniture ($500), electricity ($700), a multi-line telephone system ($600), computer cabling connection ($400) and salary of the office manager ($8500). Variable costs include commissions for the sales staff (55% of agency revenue), supplies and printing (12% of agency revenue), and usage costs for phone and computers (9% of agency revenue).
(a)Calculate the estate agency’s monthly break even commission / agency revenue in dollars.
(b)Calculate the commission / agency revenue needed to earn monthly net profit of $15,000.
(c)From your answer in (b) above, what is the gross property sales required to generate commission / agency revenue to make a $15,000 profit above breakeven.
(d)When the managing partner of Superior Estate Agency is shown your Cost Volume Profit calculations, he is quite dismissive. He says it is largely useless information because the reality of the real estate business is much more complex and dynamic with the model based on unrealistic assumption. Prepare a detailed response to the managing partner, identifying model assumptions and potential use of the model. (100 words limit)
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