Question

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				$79,000,000
Cost of goods sold
Variable		$38,710,000
Fixed		8,750,000		47,460,000
Gross margin				$31,540,000
Selling and marketing expenses
Commissions		$16,590,000
Fixed costs		10,610,000		27,200,000
Operating income				$4,340,000

The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 9% and incur additional fixed costs of $9,480,000.

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 company’s break-even point in sales dollars for the year 2017 if it hires its own sales force to replace the network of agents. (Round intermediate calculations to 2 decimal places e.g. 10.25 and final answers to 0 decimal places, e.g. 2,510.)

Answer 1

A
Contribution margin = 79000000-38710000-16590000= $23700000
CM ratio = 23700000/79000000 = 30%
Break even point =Fixed expenses/CM ratio = (8750000+10610000)/30%= $64533333
B
Variable commission = 79000000*9%= 7110000
Contribution margin = 79000000-38710000-7110000= $33180000
CM ratio = 33180000/79000000 = 42%
Break even point =Fixed expenses/CM ratio = (8750000+10610000+9480000)/42%= $68666667