Question

Help Save & Exit Subm 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: Check my work $ 29,400 Lionel Corporation Budgeted Income Statement For the Year Ending June 30, 2019 (8000 omitted) Sales Cost of goods sold Variable Fixed $ 13,230 3,528 Gross profit Selling and administrative costs Commissions $ 5,292 Fixed advertising cost 882 Fixed administrative cost 2,352 Operating income Fixed interest cost Income before income taxes Income taxes (308) Net income 16,758 $ 12,642 $ $ 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 investigare me po 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 < Prey 1 of 2 !!! Next > 9

Answer 1

1.

Fixed Costs = $9,612

Variable COGS = $13,230 / $29,400 i.e. 0.45

Selling Commission = 10%

Let Sales be x. At breakeven point,

Sales - Variable COGS - Variable Selling Commission = Fixed Costs

x - 0.45x - 0.1x = $9,612

x - 0.55x = $9,612

0.45x = $9,612

x = $9,612 / 0.45

x = $21,360

$ 21,360.00 $ 11,748.00 $ 9,612.00 CONTRIBUTION INCOME STATEMENT Sales Variable Costs Cost of goods sold $ 9,612.00 Selling Commission to salespersons $ 2,136.00 Total Variable Cost Contribution Margin Fixed Costs Manufacturing Cost $3,528.00 Advertising Cost $ 1,472.00 Admin Cost $ 2,352.00 Salesperson salaries $ 640.00 Travelling & Entertainment Expense $ 690.00 Sales Manager Salary $ 195.00 Interest Cost $ 735.00 Total Fixed Costs Operating Income $ 9,612.00

2.

Fixed Costs = $3,528 + $882 + $2,352 + $735

= $7,497

Variable COGS = 45% of sales

Selling Commission = 23% of Sales

Let Sales be y

y - 0.45y - 0.23y = $3,381 + $7,497

0.32y = $10,878

y = $10,878 / 0.32

y = 33,993.75