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, 2ee 16.644 $ 12,556 Lionel Corporation Budgeted Income Statement For the Year Ending June 30, 2019 (see omitted) Sales Cost of goods sold Variable $ 13.148 Fixed 3.504 Gross profit Selling and administrative costs Commissions 5.256 Fixed advertising cost 876 Fixed administrative cost 2.336 Operating income Fixed interest cost Income before income taxes Income taxes (30) Net income 8.468 $ 4.088 730 $ 3.358 1,087 $ 2,351 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 $670,000 for the year, and the annual cost of hiring a sales manager and sales secretary will be $185,000. 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 $570,000 if the eight salespeople are hired. Required

options to put in the statement is contribution margin, cost of goods sold, depreciation, existing, incremental, insurance, interest expenses, sales, sales, sales commissions

Answer 1

1.

	Amount
Sales	$29,200
Less: Variable cost of goods sold	($13,140)
Less: Variable sales commission ($29200 × 10%)	($2,920)
Contribution Margin	$13,140
Contribution Margin ratio [Contribution margin ÷ Sales]	0.45
Compute Fixed Cost:
Fixed cost of goods sold	$3,504
Fixed Advertising cost [$876 + $570]	$1,446
Fixed Administrative cost	$2,336
Fixed Annual sales payroll cost [8 employees × $80 per employee]	$640
Fixed travel & entertainment expense	$670
Sales manager & secretary hiring cost	$185
Total Fixed cost	$8,781

Breakeven Sales in Dollars = Fixed Cost  $\div$ Contribution margin ratio

= $8781 $\div$ 0.45

= $19513.33

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Contribution statement to prove the above:

Lionel corporation
Budgeted Income Statement
For the year ending june 30, 2019
($000 omitted)
Sales	$19,513.33
Less: Variable cost
Cost of goods sold ($13140/$29200) × $19513.33	$8,780.99
Sales commission ($2920/$29200) × $19513.33	$1,951.34
Less: Fixed cost:	$8,781
Operating Income	$0

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2.

Compute contribution margin ratio:

Variable cost of goods sold ratio ($13140/$29200)	0.45
Variable sales commission ratio (23% of sales)	0.23
Total variable cost ratio	0.68

Contribution margin ratio = 1 - Variable cost ratio

= 1- 0.68

= 0.32

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Compute Fixed cost:

Fixed cost of goods sold	$3,504
Fixed Advertising cost	$876
Fixed Administrative cost	$2,336
Total	$6,716

Target sales volume($)=9 Operating Profit + Fixed cost Contribution margin ratio $4088+56716 0.32 = $33762.5