Reference no: EM131931942

Assignment -

Need help in solving a case study on Foundation of Finance. This is a Finance Case - meaning it is quantitative.

Case - Strategic Software Sales Staffing

Consider that you are working as a regional sales director for the Southwest United States and are considering adding headcount to your territory. You currently have three territory managers (sales people) who cover the region, but you fear that they are not getting enough penetration into their territories. Currently, the territories are divided as follows:

Territory 1: Texas-Oklahoma-Louisiana                   700       5.0%

Territory 2: Arizona-New Mexico-Utah-Nevada         625       4.0%

Territory 3: KS,NE,CO,WY,ID,MT                            590       3.0%

As an example, the first territory manager will achieve expected sales next year of $700,000 and will experience an expected growth rate of 5% year over year. The horizon that you are interested in is 6 years.

You also generate revenue in your territory by selling professional services and consulting services. Each territory manager "rides" with a systems engineer and a consultant to sell these services as well. You expect to see higher expected revenue from these services the more a sales person penetrates the territory. In the next year, you expect that you will receive revenues from professional services and consulting services of $230,000 and $100,000, and you expect the growth of these revenue streams to be 3.5% and 2%, respectively. These figures are for your entire region. You estimate that the expected cost of providing these services is 50% of the revenue they generate.

Your territory managers receive a base salary of $100,000 each plus a bonus commission if they exceed a particular sales threshold. Specifically, in year one, if their sales revenue exceeds $400,000 they are entitled to receive 20% of the sales revenue over this threshold. This bonus is paid out as an end-of year bonus. Assume that the base salary increases 2% annually and that the threshold increases by 3.5% yearly as well. Assume that your cost of capital is 10% and that all cash flows are realized at the end of each year.

Question 1: What is the current pre-tax value of your region to the company?

Now, consider that you are faced with the following sales re-organization in which you add another territory manager, but split the region four ways as follows:

Territory 1 TS,LA                   500      8.0%

Territory 2 AZ,UT,NV              500      6.0%

Territory 3 NE,CO,WY,ID,MT    450      4.5%

Territory 4 OK,NM,KS              275      15.0%

Again, as an example, TM 1 now only sells in Texas and Louisiana, is expected to receive $500,000 in sales revenue, and is expected to realize a growth rate of 8.0% each year. As a result, revenue from professional services and consulting is expected to grow at 10% and 6% per year, respectively. It costs $100,000 in base salary to hire the extra territory manager. Assume that the payment scheme for all territory managers is the same and unchanged from the previous case.

Question 2: What added benefits and costs arise from making this change?

Question 3: Under the current assumptions, should you recommend adding head count in your region?

Question 4: Consider changing your assumptions. What types of differences would have to exist for you to consider adding headcount? Specifically, consider the assumptions regarding cannibalism, sales penetration, bonus compensation, growth in professional services and consulting revenue.