Explanation:
The data in the statements below are in thousands of US dollars.
| 15% Commission | 20% Commission | Own Sales Force | ||||||||||||||||
| Sales | $ | 16,000 | 100 | % | $ | 16,000 | 100 | % | $ | 16,000.00 | 100.0 | % | ||||||
| Variable expenses: | ||||||||||||||||||
| Manufacturing | 7,200 | 7,200 | 7,200.00 | |||||||||||||||
| Commissions (15%, 20%, 7.5%) | 2,400 | 3,200 | 1,200.00 | |||||||||||||||
| Total variable expenses | 9,600 | 60 | % | 10,400 | 65 | % | 8,400.00 | 52.5 | % | |||||||||
| Contribution margin | 6,400 | 40 | % | 5,600 | 35 | % | 7,600.00 | 47.5 | % | |||||||||
| Fixed expenses: | ||||||||||||||||||
| Manufacturing overhead | 2,340 | 2,340 | 2,340.00 | |||||||||||||||
| Marketing | 120 | 120 | 2,520.00 | 1 | ||||||||||||||
| Administrative | 1,800 | 1,800 | 1,725.00 | 2 | ||||||||||||||
| Interest | 540 | 540 | 540.00 | |||||||||||||||
| Total fixed expenses | 4,800 | 4,800 | 7,125.00 | |||||||||||||||
| Income before income taxes | 1,600 | 800 | 475.00 | |||||||||||||||
| Income taxes (30%) | 480 | 240 | 142.50 | |||||||||||||||
| 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 ratio | 0.40 |
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 ratio | 0.35 |
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 ratio | 0.475 |
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) | 4 | 7 | 16 | ||||||
Get your accounting solutions done right the first time by placing your order on our website accountinghomeworkhelps.com today!
Related Samples
Callisto Mining Company Case Study