Below is a variable costing income statement for Texas Brewery. The budget for 2

Question

Below is a variable costing income statement for Texas Brewery. The budget for 2016 follows:

Texas Brewery Budgeted Variable Costing Income Statement For the Year Ending December 31, 2016

Sales $30,000,000

Less variable costs:

Cost of goods sold $10,000,000

Selling expense 8,000,000 18,000,000

Contribution margin 12,000,000

Less fixed costs:

Manufacturing expense 4,600,000

Selling expense 2,400,000

Administrative expense 4,000,000 11,000,000

Net income $ 1,000,000

For the coming year, the company is considering hiring two additional sales representatives at $100,000 each for base salary plus 8 percent of their sales for commissions. The company anticipates that each sales representative will generate $1,200,000 of incremental sales. What is the impact of the proposed hiring decision and should they do it?

Explanation / Answer

Solution:

Calculation of Contribution Margin Ratio:

Contribution Margin Ratio = Contribution Margin/ Sales

= 12,000,000/ 30,000,000

= 0.40

= 40%

Calculation of Incremental Profit:

Incremental Profit = (Incremental Sales * Contribution Margin Ratio) – Salaries – Commission

= (2,400,000 * 0.40) – 200,000 – (2,400,000 * 0.08)

= 960,000 – 200,000 – 192,000

= 568,000

Profit Increase = 568,000

Working Note:

Incremental Sales = 1,200,000 * 2 = 2,400,000

Salaries = 100,000 * 2 = 200,000

Commission = 2,400,000 * 0.08 = 192,000

Conclusion:

Since profit increases, Texas Brewery should hire the two additional sales representatives.

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