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: $ 30,500 17,385 $13, 115 Lionel Corporation Budgeted Income Statement For the Year Ending June 30, 2019 5000 omitted) Sales Cost of goods sold Variable $ 13,725 Fixed 3,660 Gross profit Selling and administrative coats Commissions $ 5,490 Fixed advertising cost 915 Fixed administrative cost 2,440 Operating income Fixed interest cost Income before income taxes Income taxes (300) Net income 8,845 $ 4,270 $ 3,507 1,052 2.455 $ 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 $800,000 for the year, and the annual cost of hiring a sales manager and sales secretary will be $250,000. 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

Answer 1

Contribution income statement

Sales	$30,500
Less: Variable costs
Variable cost of goods sold	(13,725)
Commission(10% of 30,500)	(3,050)
Contribution margin	$13,725
Less: Fixed costs
Fixed cost of goods sold	(3,660)
Fixed sales salaries (640+250)	(890)
Fixed travel and entertainment expense	(800)
Fixed advertising expense(915+700)	(1,615)
Fixed administrative expense	(2,440)
Operating income	$4,320
Fixed interest cost	(763)
Income before income tax	$3,557
Income tax (30%)	(1,067)
Net income	$2,490

Contribution margin ratio =$13,725/$30,500 =45%

Total fixed costs = $3,660+ $890+$800+$1,615+$2,440+$763 =$10,168

Break even point in sale dollars = $10,168/45% =$22,595

2. Let volume in sales dollars be Y

Revenue- Variable cost of goods sold - Comission- Fixed costs of goods sold- Fixed advertising cost - Fixed administrative cost - Fixed interest cost = Income before taxes in Budgeted income statement

Y - 0.45Y - 0.23Y - 3,660 - 915 - 2,440 -763 =$3,507

0.32Y = $11,285

Y = $35,266

The amount of sales dollars to generate the operating profit as projected I the budgeted income statement is $35,266.

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