Question

Lionel Corporation manufactures pharmaceutical products sold through a network of sales agents in the United States and Canada. The agents are currently paid an 18% commission on sales, that percentage was used when Lionel prepared the following budgeted income statement for the fiscal year ending June 30, 2019: $ 29,600 16,872 $ 12,728 Lionel Corporation Budgeted Income Statement For the Year Ending June 30, 2019 ($ 000 omitted) Sales Cost of goods sold Variable $ 13, 320 Fixed 3,552 Gross profit Selling and administrative costs Commissions $ 5,328 Fixed advertising cost 888 Fixed administrative cost 2,368 Operating income Fixed interest cost Income before income taxes Income taxes (30%) Net income 8,584 $ 4,144 740 $ 3,404 1,021 $ 2,383 Since the completion of the income statement, Lionel has learned that its sales agents are requiring a 5% increase in their commission rate (to 23%) for the upcoming year. As a result, Lionel's president has decided to investigate the possibility of hiring its own sales staff in place of the network of sales agents and has asked Alan Chen, Lionel's controller, to gather information on the costs associated with this change. Alan estimates that Lionel must hire eight salespeople to cover the current market area, at an average annual payroll cost for each employee of $80,000, including fringe benefits expense. Travel and entertainment expenses is expected to total $710,000 for the year, and the annual cost of hiring a sales manager and sales secretary will be $205,000. In addition to their salaries, the eight salespeople will each earn commissions at the rate of 10% of sales. The president believes that Lionel also should increase its advertising budget by $610,000 if the eight salespeople are hired.

Answer 1

Refer to the below images for the above asked questions, in a detailed way of solution with explanation.

reall even Peajovimento dollars (in thousands) sorat fixed cost contribution margin ratio = 96808 + 2165 (1-VEGS rate - Commission rate) & 8973 = $ 8973 - 19940 -0.45-0010 0.45 Workings : variable cost et (vas) goods - sold rate (in thousands) 13320 9 29600 451- of sales - 100 corrent fixed fixed fixed Total fixed costs (& in thousands): cost of goods sold $ 3552 advertising cost administrative cost fixed costs → & 6808 4 888 f 2368 1006 Incremental fixed costs ( in thousands): sales people (8x $80) & 640 Gravel & entertanment ($710000) $710 Manager I Seevetary ( 205000 $205 Additional advertising ($610000) $610 Total 1900 42165

Contribution Income statement Amount Amount 9 19940 particulars Sales variable costs a cost of goods sold (@454-) Sales Commissions (@101) contribution margin fixed costs: Existing incremental $8973 $ 1994 & 10967 $8973 $ 6808 † 216j $ 8973 operating income (before interest as taxes) maintain while Required so income, & 4144 in commission) : corrent level of paying the requested operating increase Requi Let y a required sales level I 4144 = Total sales total variable costs - total fixed 4144 = [X - (0.45X+ 0.23%)] - $6808 & 10952 = x - 0.68x :- 0.32X = $ 1095 x40952 -32 x = $34225 This is than $4625 [134225 - $ 29600] greater budgeted sales.