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, 2020, is as follows.

BONITA BEAUTY CORPORATION Income Statement For the Year Ended December 31, 2020
Sales				$76,400,000
Cost of goods sold
Variable		$32,852,000
Fixed		8,720,000		41,572,000
Gross margin				$34,828,000
Selling and marketing expenses
Commissions		$15,280,000
Fixed costs		10,360,900		25,640,900
Operating income				$9,187,100

The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 7% and incur additional fixed costs of $9,932,000.

1. Calculate the estimated sales volume in sales dollars that would generate an identical net income for the year ending December 31, 2020, regardless of whether Bonita Beauty Corporation employs its own sales staff and pays them an 7% commission or continues to use the independent network of agents.

Estimated sales volume:

Answer 1

1)

Estimated Sales Volume

$ 76,400,000

Explanation:

1) The sales level at which operating incomes will be identical is called the point of indifference. Thiswould be when the cost of the network of agents (20% of sales) is exactly equal to the cost of paying employees 7% commission along with additional fixed costs of $9,932,000.

2) None of the other costs isrelevant, because they will not change between alternatives.

3) Equation would be: ( Where, S =sales volume)

S × 20%	=	S × 7% + $ 9,932,000
0.20 S	=	0.07 S + $ 9,932,000
0.20S - 0.07 S	=	$9,932,000
0.13S	=	$9,932,000
S	=	$9,932,000/ 0.13
Sales Volume	=	$76,400,000