Explanation:

The data in the statements below are in thousands of US dollars.

15% Commission20% CommissionOwn Sales Force
  Sales$16,000100%$16,000100%$16,000.00100.0%
  Variable expenses:
     Manufacturing7,2007,2007,200.00
     Commissions (15%, 20%, 7.5%)2,4003,2001,200.00
  Total variable expenses9,60060%10,40065%8,400.0052.5%
  Contribution margin6,40040%5,60035%7,600.0047.5%
  Fixed expenses:
     Manufacturing overhead2,3402,3402,340.00
     Marketing1201202,520.001
     Administrative1,8001,8001,725.002
     Interest540540540.00
  Total fixed expenses4,8004,8007,125.00
  Income before income taxes1,600800475.00
  Income taxes (30%)480240142.50
  Net income$1,120$560$332.50

 

1$120,000 + $2,400,000 = $2,520,000
2$1,800,000 − $75,000 = $1,725,000

1. When there is no income before tax, the income will be zero and hence no breakeven. even calculations can be based on the income before taxes.

a. Break-even point in dollar sales if the commission remains 15%:

Dollar sales to break even=Fixed expenses=$4,800,000 = $12,000,000
CM ratio0.40

b. Break-even point in dollar sales if the commission increases to 20%:

Dollar sales to break even=Fixed expenses=$4,800,000 = $13,714,286
CM ratio0.35

c. Break-even point in dollar sales if the company employs its own sales force:

Dollar sales to break even=Fixed expenses=$7,125,000 = $15,000,000
CM ratio0.475

2. For generating a 1,120,000 net income, the company needs to generate 1,600,000 in income before taxes. Therefore,

Dollar sales to attain target=Target income before taxes + Fixed expenses
CM ratio

 

 

=$1,600,000 + $4,800,000
0.35

 

=$6,400,000 = $18,285,714
0.35

3. In order to determine the volume of sales where net income would be equal under either the 20% commission plan or the company sales force plan, we find the volume of sales where costs before income taxes under the two plans are equal.

X=Total sales revenue
0.65X + $4,800,000=0.525X + $7,125,000
   0.125X=$2,325,000
X=$2,325,000 ÷ 0.125
  X=$18,600,000

Thus, at a sales level of $18,600,000 either plan would yield the same income before taxes and net income.

4. a., b., and c.

15%
Commission
20%
Commission
Own
Sales Force
  Contribution margin (Part 1) (a)$6,400,000$5,600,000$7,600,000
  Income before taxes (Part 1) (b)$1,600,000$800,000$475,000
  Degree of operating leverage: (a) ÷ (b)4716