Question

please highlight the final answer

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: $ 29,000 Lionel Corporation Budgeted Income statement For the Year Ending June 30, 2019 ($000 omitted) Sales Cost of goods sold Variable $ 13,050 Fixed 3,480 GTON profit Selling and administrative coats Commissions $ 5,220 Pixed advertising cost Pixed administrative cost 2,320 Operating income Fixed interest cost Income before income taxes Income taxes (308) Net income 16,530 $ 12, 470 $ 8,410 4,060 725 3,335 1,001 2,335 $ 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 $650,000 for the

Answer 1

* Final answer is in bold.

1.

Sales:		19300
Variable costs
Cost of goods sold	8685		[13050/29000*19300]
Sales commission	1930		[19300*10%]
Total variable costs		10615
Contribution		8685
Fixed costs
Existing	6670
Incremental	2015		[650+550+175+640]
Total fixed costs		8685
Operating Income		0

Workings:

Fixed costs
Cost of goods sold	3480
Advertising	1420
Administrative cost	2320
Payroll costs	640
Travel and entertainment expenses	650
Sales manager and secretary	175
Total fixed costs	8685
Contribution margin	45%
Break even sales in $	19300

2.

Existing fixed costs
Cost of goods sold	3480
Advertising	870
Administrative cost	2320
Total	6670
Desired profit	4060
Desired level of contribution	10730
Contribution ratio	32%
Desired sales[10730/32%]	33531.25

Workings:

Variable cost %	45%	[13050/29000]
Variable sales commission %	23%
Total	68%
Contribution ratio	32%