BONITA BEAUTY CORPORATION Income Statement For the Year Ended December 31, 2017

Question

BONITA BEAUTY CORPORATION
Income Statement
For the Year Ended December 31, 2017

(a)

Under the current policy of using a network of sales agents, calculate the Bonita Beauty Corporation’s break-even point in sales dollars for the year 2017

Break Even point: ________________________

b.)Calculate the degree of operating leverage at sales of $74,800,000 if

(1) Bonita Beauty uses sales agents, and

(2) Bonita Beauty employs its own sales staff. (Round answers to 2 decimal places)

c.)Calculate the estimated sales volume in sales dollars that would generate an identical net income for the year ending December 31, 2017, regardless of whether Bonita Beauty Corporation employs its own sales staff and pays them an 10% commission or continues to use the independent network of agents.

Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 21% of sales. The income statement for the year ending December 31, 2017, is as follows.

BONITA BEAUTY CORPORATION
Income Statement
For the Year Ended December 31, 2017

Sales $74,800,000 Cost of goods sold     Variable $33,660,000     Fixed 8,590,000 42,250,000     Gross margin $32,550,000 Selling and marketing expenses     Commissions $15,708,000     Fixed costs 10,890,000 26,598,000     Operating income $5,952,000
The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 10% and incur additional fixed costs of $8,228,000.

Explanation / Answer

Solution a:

Exising contribution margin = Sales - Variable costs = $74,800,000 - ($33,660,000 + $15,708,000) = $25,432,000

Contribution margin ratio = $25,432,000 / $74,800,000 = 34%

Fixed costs = $8,590,000 + $10,890,000 = $19,480,000

Breakeven sales in dollar = Fixed costs / contribution margin ratio = $19,480,000 / 34% = $57,294,118

Solution b 1:

Degree of operating leverage when bonita beauty uses sales agent = Contribution / Net operating income

= $25,432,000/ $5,952,000 = 4.27

Solution b2:

IF compnay employs own sales staff then new sales commissions = $74,800,000 *10% = $7,480,000

New fixed selling and marketing expenses = $10,890,000 + $8,228,000 = $19,118,000

New contribution margin = $74,800,000 - ($33,660,000 + $7,480,000) = $33,660,000

New operating income = $33,660,000 - $19,118,000 - $8,590,000 = $5,952,000

New contribution margin ratio = $33,660,000 / $74,800,000 = 45%

Operating leverage when bonita employs its own sales staff = $33,660,000 / $5,952,000 = 5.66

Solution c:

Estimated sales volume is $74,800,000 at which net operating income under both options are same, therefore at sales volume of $74,800,000, net income will be identical regardless of whether Bonita Beauty Corporation employs its own sales staff and pays them an 10% commission or continues to use the independent network of agents.

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