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: $ 29,400 16,758 $ 12,642 Lionel Corporation Budgeted Income Statement For the Year Ending June 30, 2019 (see omitted) Sales Cost of goods sold Variable $ 13, 230 Fixed 3,528 Gross profit Selling and administrative costs Commissions $ 5,292 Fixed advertising cost Fixed administrative cost 2,352 Operating income Fixed interest cost Income before income taxes Income taxes (30%) Net income 882 $ 8, 526 4, 116 735 3,381 1.014 2,367 $ $ 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, Lionels 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 elght salespeople will each earn commissions at the rate of 10% of sales. The president believes that Lionel also should increase its advertising budget by $590,000 If the eight salespeople are hired.

Answer 1

Solution:

1.a)

Break - even point in sales dollars:

Contribution margin ratio	45%($13,230/$29,400)
Total fixed costs	$9,612(3,528+835+690+1,472+2,352+735)
Break even point in sales dollars	$21,360($9,612/45%)

Contribution Margin Income Statement(in 000s)

Sales	$29,400
Variable costs:
Variable costs of goods sold	$13,230
Commissions	$2,940(29,400×10%)
Contribution margin	13,230
Fixed costs:
Fixed costs of goods sold	$3,528
Fixed sale salaries($80,000 ×8+195,000)	$835(640 + 195)
Fixed travel and Entertainment expenses	$690
Fixed advertising costs	$1,472($882+$592)
Fixed admin costs	$2,352
Operating income	$4,353
Fixed interest costs	$735
Income Before income taxes	$3,618
Income taxes (30%)	$1085.40
Net income($3,618,000 - $1,085,000.40)	$2,532,999.60

2.)

First, we let volume in sales dollars be Y.

Income before taxes in Estimated income statement =Revenue - Variable costs of goods sold - Commissions - Fixed costs of goods sold - Fixed advertising costs - Fixed administrative costs - Fixed interest costs

3,381 =Y - 0.45Y - 0.23Y - 3,528 - 882 - 2,352 - 735

3381 =Y -0. 68Y - 7,497

Y -0. 68Y =3,381+7,497

0.32Y =10,878

Y =10878/0.32

=33,993.75

Estimated volume (in sales dollars) =$33,993.75