kindle inc. manufacures cosmetic products that are sold through a network of sal

Question

kindle inc. manufacures cosmetic products that are sold through a network of sales agents. the agents are paid a commision of 12.5% of sales. the income statement for the year ending december 31, 2013, is as follows;

kindle inc

income statement

year ending december 31, 2013

sales                                                                                             $130,000

cost of goods sold                     

variable                                              $58,500

   fixed                                                 $14,230                              72,850

   gross margin 57,150

selling and marketing expenses

   commissions $16,250

   fixed costs 17,100 33,350

   operating income $23,800

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 $13,000 million

instructions

a. under the current policy of using a network of sales agents, calculate kindle, inc.'s break-even point in sales dollars for the year 2013

b. calculate the company's break-even point in sales dollars for the year 2013 if it hires its own sales force to repolace the network of agents

c. calculate the degree of operating leverage at sales of $130 million if (1) kindle, inc. uses sales agents, and (2) kindle, inc. employs its own sales staff                                             

Explanation / Answer

In your question there is calculation error as

Cost of Goods sold

Variable = 58500

Fixed = 14230

Total is = 72730 and not 72850 as given in question

For solving i have assumed that fixed part is 14350

then

Variable 58500

Fixed = 14350

Total = 72850 as given in question

Summarizing data on basis of variable costing Amount Sale 130000 Less : Variable costs Cost of goods sold 58500 selling commision 16250 Total Variable 74750 Contribution ( Sale - Variable costs) 55250 P/V Ratio ,   =Contirbution / sales 0.425 Less Fixed costs Cost of Goods sold 14350 Selling and marketing 17100 Total Fixed costs 31450 Operating income ( Cotribution - Fixed cost) 23800 a) Breakeven sales in dollar Breakeven is point of sale where company incurrs no profit no loss it is calculated as = Fixed Costs / Pv Ratio = 31450 / 0.425 = $ 74000 b) For New breakeven we need to re arrange data as Amount Sale 130000 Less : Variable costs Cost of goods sold 58500 selling commision 13000 ( 10 % on sales to sales staff) Total Variable 71500 Contribution ( Sale - Variable costs) 58500 P/V Ratio ,   =Contirbution / sales 0.45 Less Fixed costs Cost of Goods sold 14350 Selling and marketing 30100 ( 17100 +13000 additional selling fixed cost) Total Fixed costs 44450 Operating income ( Cotribution - Fixed cost) 14050 New Breakeven = updated Fixed costs / Updated PV ratio = 44450 / 0.45 $                                          98,778.00 C) operating leverage measures companies fixed costs as percentage to its total cost operating leverage is measured in terms of contribution and net operating income = contribution / net operating income option 1 = 55250 / 23800 2.32 times option 2 = 58500 /14050 4.16 times

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