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: $ 29,500 16,815 $ 12, 685 Lionel Corporation Budgeted Income Statement For the Year Ending June 30, 2019 ($000 omitted) sales Cost of goods sold Variable $ 13, 275 Fixed 3, 540 Gross profit Selling and administrative costs Commissions $ 5,310 Fixed advertising cost 885 Fixed administrative cost 2,360 Operating income Fixed interest cost Income before income taxes Income taxes (30%) Net income $ $ 8,555 4, 130 738 3,392 1,018 2,374 $ 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 $700,000 for the year, and the annual cost of hiring a sales manager and sales secretary will be $200,000. 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 $600,000 if the eight salespeople are hired. Required 1. Determine Lionel's breakeven point (operating profit = 0) in sales dollars for the fiscal year ending June 30, 2019, if the company hires its own sales force and increases its advertising costs. Prove this by constructing a contribution income statement. 2. If Lionel continues to sell through its network of sales agents and pays the higher commission rate, determine the estimated volume in sales dollars that would be required to generate the operating profit as projected in the budgeted income statement. Complete this question by entering your answers in the tabs below. Required 1 Required 2 If Lionel continues to sell through its network of sales agents and pays the higher commission rate, determine the estimated volume in sales dollars that would be required to generate the operating profit as projected in the budgeted income statement. (Do not round intermediate calculations. Enter your answers in the candle of a llare

Answer 1

Answer with working notes is given below

Increase in Fixed cost Annual payroll cost Travel and entertainment expense Annual hiring cost Total cost of own staff in 000's $640 (8 X $80,000) $700 $200 $1,540 Revised Fixed Cost Manufacturing cost Own staff cost Advertising cost Administrative expense Total Fixed cost $3,540 $1,540 $1,485($885+$600) $2,360 $8,925 Sales $29,500 $13,275 $2,950 Less: Variable cost Cost of goods sold Commission - 10% of Sales Contribution Contribution Margin % (Contribution/Sales) % $16,225 $13,275 45.00% 1 Break-even point in Sales $ Fixed Cost Contribution Margin % $8,925 45.00% 25.00% $19,833 $19,833 $10,908 $8,925 Contribution Income Statement Sales Less: Variable Cost Cost of goods sold -45% of Sales $8,925 Commission - 10% of Sales $1,983) Contribution Less: Fixed cost manufacturing cost $3,540 Own sales staff $1,540 Advertising cost $1,485 Administrative cost $2,360 Operating Profit $8,925 $0 Break-even point is proved COGS % = $13,275/$29,500 *100% = 45% Estimated volume ( in Sales dollars) $34,109 Sales $29,500 $13,275 $6,785 Less: Variable Cost Cost of goods sold -45% of Sales Commission - 23% of Sales Contribution Contribution Margin % (Contribution/Sales) % $20,060 $9,440 32.00% $4,130 Operating profit required Fixed Cost Manufacturing cost Advertising cost Administrative cost Total Target Contribution Margin % $3,540 $885 $2,360 $6,785 $10,915 A 32.00% B Total Sales $ needed $34,109 A/B Cross checking $34,109 Contribution Income Statement Sales Less: Variable Cost Cost of goods sold -45% of Sales $15,349 Commission on sales - 23% of Sales $7,845 Contribution Less: Fixed cost Manufacturing cost $3,540 Advertising cost $885 Administrative cost $2,360 Operating Profit $23,194 $10,915 $6,785 $4,130