Question

Klyne Corporation manufactures pharmaceutical products that are sold through a network of sales agents. The agents are paid a commission of 22% of sales. The income statement for the year ending December 31, 2017, is as follows: KLYNE CORPORATION Income Statement For the Year Ending December 31, 2017 Sales $ 32,500,000 Cost of goods sold Variable Fixed $ 18,850,000 2,632,000 21,482,000 11,018,000 Gross margin Selling and marketing expenses Commissions Fixed costs 7,150,000 1,995,000 9,145,000 Operating income $ 1,873,000 Klyne is considering hiring its own sales staff to replace the network of agents. Klyne will pay its salespeople a commission of 15% and incur fixed costs of $2,093,000. Required: 1. Calculate Klyne Corporation's break-even point in sales dollars for the year 2017. (Round your answer to 2 decimal places.) Break-even point

Answer 1

Solution 1) Calculation of Klyne Corporation’s break-even point in sales dollars for the year 2017.

	$
Sales	3,25,00,000.00
Less: Variable Costs
Variable cost of goods sold	1,88,50,000.00
Variable selling and marketing expenses	71,50,000.00
Total Variable Costs	2,60,00,000.00
Contribution = Sales - Total Variable Costs	65,00,000.00
Less: Fixed Costs
Fixed cost of goods sold	26,32,000.00
Fixed selling and marketing expenses	19,95,000.00
Total Fixed Costs	46,27,000.00
Profit = Contribution - Total Fixed Costs	18,73,000.00

Profit Volume ratio for the year 2017 = Contribution / Sales

                                                                = $65,00,000 / $32,500,000 = 0.20

Break-even point in sales dollars for the year 2017 = Total Fixed Cost / PV Ratio

                                                                                       = $46,27,000 / 0.20 = $23,135,000

Therefore, Klyne Corporation’s Break-even point in sales dollars for the year 2017 is $23,135,000.

Solution 2) Calculation of Klyne Corporation’s break-even point in sales dollars if company had hired its own sales force to replace network of agents.

Commission to own sales force = 15% of $32,500,000 = $4,875,000

Fixed cost = $2,093,000

	$
Sales	3,25,00,000.00
Less: Variable Costs
Variable cost of goods sold	1,88,50,000.00
Variable selling and marketing expenses	48,75,000.00
Total Variable Costs	2,37,25,000.00
Contribution = Sales - Total Variable Costs	87,75,000.00
Less: Fixed Costs
Fixed cost of goods sold	26,32,000.00
Fixed selling and marketing expenses	20,93,000.00
Total Fixed Costs	47,25,000.00
Profit = Contribution - Total Fixed Costs	40,50,000.00

  Profit Volume ratio if company had hired its own sales force to replace network of agents.

= Contribution / Sales

= $87,75,000.00 / $32,500,000 = 0.27

Break-even point in sales dollars if company had hired its own sales force to replace network of agents.

= Total Fixed Cost / PV Ratio

= $47,25,000 / 0.27 = $17,500,000

Therefore, Klyne Corporation’s Break-even point in sales dollars if company had hired its own sales force to replace network of agents is $17,500,000

Solution 3) Calculation of Degree of Operating Leverage

Operating Leverage = Contribution / Earnings before Interest and Tax

1. If Klyne uses sales agents

Operating Leverage = $65,00,000.00 / 18,73,000.00 = 3.47 Times

2. If Klyne employs its own staff

Operating Leverage = $87,75,000.00 / 40,50,000.00 = 2.17 Times

Operating leverage shows the effect of change in sales on the level of operating profits of the firm. The firm should try to avoid high degree of operating leverage as it a condition of high risk as a small decrease in sales can excessively affect the profitability of the frim.

Solution 4) Calculation of Sales in dollars to earn an operating profit of $1,873,000 if Klyne increases the commission paid to its sales staff to 12%.

Commission to own sales force = 12% of $32,500,000 = $3,900,000   

	$
Sales	3,25,00,000.00
Less: Variable Costs
Variable cost of goods sold	1,88,50,000.00
Variable selling and marketing expenses	39,00,000.00
Total Variable Costs	2,27,50,000.00
Contribution = Sales - Total Variable Costs	97,50,000.00
Less: Fixed Costs
Fixed cost of goods sold	26,32,000.00
Fixed selling and marketing expenses	20,93,000.00
Total Fixed Costs	47,25,000.00
Profit = Contribution - Total Fixed Costs	50,25,000.00

Profit Volume Ratio = Contribution / Sales = $97,50,000 / $3,25,00,000 = 0.30

Therefore, Sales in Dollars to earn an operating profit of $1,873,000

= (Fixed Cost + Desired Profit) / PV Ratio

= ($4,725,000 + $1,873,000) / 0.30 = $21,993,333.33

Sales in dollars to earn an operating profit of $1,873,000 if Klyne increases the commission paid to its sales staff to 12% is $21,993,333.33.