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 Lionel Corporation Budgeted Income Statement For the Year Ending June 30, 2019 cost of goods sold Variable Fixed Gross profit Selling and administrativ Comissions Fixed advertising cost Fixed administrative cost Operating income Fixed interest cost Income before income taxes Since the completion of the income statement, Lionel has learne that its sales agents are requiring a 5% increase in their commission rate to 233 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 $690,000 for the year, and the annual cost of hiring a sales manager and sales secretary will be $195,000. In addition to their salaries, the eight salespeople wil each eam commissions at the rate of 10% of sales. The president belleves that Lionel also should increase its advertising budget by $590.000 the elght salespeople are hired. Required 1. Determine Lionel breakeven point operating profitot sales dollars for the fiscal year ending June 30, 2019, if the company hires its own salesforce and increases its advertising costs. Prove this by constructing a contribution income statement ore conues to Sethrough its network of sales agents and pays the higher commission rate, determine the estimated volume in sales polls that would be required to generate the operating profitas projected in the budgeted income statement

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Answer 1

Requirement 1

Breakeven point is that point where there is no profit or loss i.e. net operation profit is zero. This is computed by dividing the total fixed costs by contribution margin ratio.

Sales	29,400
less: Variable Costs
Variable Cost of Goods Sold	13,230
Commissions	2,940 (10% x 29,400)
Contribution Margin	13,230
less: Fixed Costs
Fixed Cost of Goods Sold	3,528
Fixed Sales Salaries (80,000 *8 + 195,000)	835
Fixed Travel and Entertainment Expenses	690
Fixed Advertising Cost (882+590)	1472
Fixed Admin Cost	2,352
Operating Income	4,353
Less: Fixed Interest Cost	735
Income Before Income Taxes	3,618
Less: Income Taxes (30%)	1,014
Net Income	2,604

Note that for fixed sales salaries, 8 employees are paid $ 80,000 each

Contribution margin ratio = 13,230/29,400 = 45%

Total fixed costs = 3528+835+690+1472+2352 +735 = $ 9,612

Break-even point = Fixed costs/contribution margin = 9,612/45% = $ 21,360

Requirement 2

Let volume in sales dollars be X.

Revenue - Variable Cost of Goods Sold - Commissions - Fixed Cost of Goods Sold - Fixed Advertising Cost - Fixed Administrative Cost - Fixed Interest Cost = Income before taxes in Budgeted Income Statement

X - 0.45X - 0.23X – 3528 - 882 – 2352 - 735 = 3,381

0.32X = 10,878

X = $ 33,993.75

The amount of sales dollars to generate the operating profit as projected I the budgeted income statement is $ 33,993.75 rounded to $ 33,994

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