Lake Champlain Sporting Goods Company, a wholesale supply company, engages indep
ID: 2493690 • Letter: L
Question
Lake Champlain Sporting Goods Company, a wholesale supply company, engages independent sales agents to market the company’s products throughout New York and Ontario. These agents currently receive a commission of 20 percent of sales, but they are demanding an increase to 25 percent of sales made during the year ending December 31, 20x4. The controller already prepared the 20x4 budget before learning of the agents’ demand for an increase in commissions. The budgeted 20x4 income statement is shown below. Assume that cost of goods sold is 100 percent variable cost.
Lake Champlain Sporting Goods Company, a wholesale supply company, engages independent sales agents to market the company's products throughout New York and Ontario. These agents currently receive a commission of 20 percent of sales, but they are demanding an increase to 25 percent of sales made during the year ending December 31, 20x4. The controller already prepared the 20x4 budget before learning of the agents' demand for an increase in commissions. The budgeted 20x4 income statement is shown below. Assume that cost of goods sold is 100 percent variable cost. LAKE CHAMPLAIN SPORTING GOODS COMPANY Budgeted Income Statement For the Year Ended December 31, 20x4 Sales Cost of goods sold $15,000,000 9,000,000 6,000,000 Gross margin Selling and administrative expenses $3,000,000 Commissions All other expenses (fixed) 90,000 3,090,000 Income before tax Income tax (35%) $2,910,000 1,018,500 es Net income $ 1,891,500 The company's management is considering the possibility of employing full-time sales personnel. Three individuals would be required, at an estimated annual salary of $27,000 each, plus commissions of 4 percent of sales. In addition, two sales managers would be employed at fixed annual salaries of $75,000 each. All other fixed costs, as well as the variable cost percentages, would remain the same as the estimates in the 20x4 budgeted income statementExplanation / Answer
Lake Champions Sporting Goods Company Break Even calculation Details Amt $ 1 Sales 15,000,000 Less Variable costs Cost of Goods sold 9,000,000 Sales commission 3,000,000 Total Variable costs 12,000,000 Contribution Margin 3,000,000 Contribution Margin % 20.00% Total Fixed cost 90,000 Break even sales $ =90000/20%= 450,000 So Break even $ Sales =$450,000 2 BEP when own sales people employed Sales 15,000,000 Less Variable costs Cost of Goods sold 9,000,000 Sales commission @4% of sales = 600,000 Total Variable costs 9,600,000 Contribution Margin 5,400,000 Contribution Margin % 36.00% Total Fixed cost Other Fixed costs 90,000 Salary of sales personnel (3 no) 81,000 Sales manager's salary (2 no) 150,000 Total Fixed costs 321,000 Break even sales $ =321000/36%= $ 891,666.67 3 Budgeted net Income Sales 15,000,000 Less Variable costs Cost of Goods sold 9,000,000 Sales commission@20% 3,000,000 Total Variable costs 12,000,000 Contribution Margin 3,000,000 Total Fixed cost 90,000 Net Operating Income 2,910,000 less ; Income Tax @35%= 1,018,500 Net Income = 1,891,500 same net Income required when sales commission increases to 25% So the required contribution margin = 3,000,000 Variable costs as % Cost of goods sold 60% Sales commission @25% 25% Total Variable cost 85% So Contribution Margin % = 15% Required Contribution margin 3,000,000 Required sales =3000000/15%= 20,000,000 So required sales volume is $20,000,000 4 when the net income of own sales people option and 25% sales commision option is same, the net operating income of both options are same. Assume the sales is S For own sales people , contribution margin% is 36% and total fixed cost =321000 So net operating income =S*0.36-321000 For sales commission of 25% , the contribution margin is 15% and fixed costs =90000. so net operating income = S*0.15-90000 Now S*0.36-321000=S*0.15-90000 S*0.21=231000 S=1100000 So required sales volume is $1,100,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.