Question

Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 20% 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				$77,300,000
Cost of goods sold
Variable		$37,877,000
Fixed		8,760,000		46,637,000
Gross margin				$30,663,000
Selling and marketing expenses
Commissions		$15,460,000
Fixed costs		10,000,000		25,460,000
Operating income				$5,203,000

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 $7,730,000.

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

Solution:

Break even point in sales dollars = $6,46,09,756

Explanation:

Sales	$77,300,000
Variable costs	$45,607,000*
Contribution margin (77300000-45607000)	$31,693,000
Less: Fixed costs	$26,490,000**
Operating Income (31,693,000-26,490,000)	$5,203,000

*Variable cost = 37,877,000 + 10%(77,300,000) = 37877000+7730000 = $45,607,000

**Fixed cost = $8,760,000 + 10,000,000 + 7,730,000 = $2,6490,000

Contribution margin ratio = (Contribution / sales )x 100 = ( $31,693,000/ $77,300,000) x 100 = 41%

Break even point($) = Fixed cost / Contribution ratio = $26,490,000 / 41% = $6,46,09,756