Question

Waterway Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 21% of sales. The income statement for the year ending December 31, 2020, is as follows.

WATERWAY BEAUTY CORPORATION
Income Statement
For the Year Ended December 31, 2020
Sales $79,000,000
Cost of goods sold
Variable $32,390,000
Fixed 8,750,000 41,140,000
Gross margin $37,860,000
Selling and marketing expenses
Commissions $16,590,000
Fixed costs 10,607,200 27,197,200
Operating income $10,662,800
The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 9% and incur additional fixed costs of $9,480,000.
A. Calculate the company’s break-even point in sales dollars for the year 2017 if it hires its own sales force to replace the network of agents.
B. Calculate the degree of operating leverage at sales of $78,800,000 if (1) Bonita Beauty uses sales agents, and (2) Bonita Beauty employs its own sales staff.
C. Calculate the estimated sales volume in sales dollars that would generate an identical net income for the year ending December 31, 2017, regardless of whether Bonita Beauty Corporation employs its own sales staff and pays them an 10% commission or continues to use the independent network of agents.

Answer 1

A or D

Step-by-step explanation:

Answer 2

a) total sales = $79,000,000

variable costs:

• COGS $32,390,000
• commissions $7,110,000
• total variable costs = $39,350,000

contribution margin ratio = $39,350,000 / $79,000,000 = 0.5

total fixed costs = $8,750,000 + $10,607,200 + $9,480,000 = $28,837,200

break even point = $28,837,200 / 0.5 = $57,674,400

b) one of the formulas that we can use to calculate the degree of operating leverage is:

operating leverage = fixed costs / total costs

1) total costs using sales agents = $8,750,000 + $10,607,200 + ($78,800,000 x 0.62) = $68,213,200

total fixed costs = $8,750,000 + $10,607,200 = $19,357,200

degree of operating leverage = $19,357,200 / $68,213,200 = 28.38%

2) total costs employing its own sales staff = ($78,800,000 x 0.5) + $8,750,000 + $10,607,200 + $9,480,000 = $68,237,200

total fixed costs = $28,837,200

degree of operating leverage = $28,837,200 / $68,237,200 = 42.26%

c) when the sales level is $79,000,000, the operating income for both alternatives is $10,662,800

($79,000,000 x 0.5) - $28,837,200 = $10,662,800

($79,000,000 x 0.38) - $19,357,200 = $10,662,800