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				$70,800,000
Cost of goods sold
Variable		$33,276,000
Fixed		8,840,000		42,116,000
Gross margin				$28,684,000
Selling and marketing expenses
Commissions		$14,868,000
Fixed costs		10,570,000		25,438,000
Operating income				$3,246,000

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 $8,496,000.

a) Break even point for 2017

b) Breakeven point in sales dollars for the year 2017 if it hires its own sales force to replace network of agents

Answer 1

1.

Fixed Costs = 8,840,000 + 10,570,000 = 19,410,000

Variable costs = 33,276,000 + 14,868,000 = 48,144,000

Contribution margin = Sales - Variable costs

= 70,800,000 - 48,144,000

= 22,656,000

Contribution margin ratio = Contribution margin / Sales * 100

= 22,656,000 / 70,800,000

= 32%

Breakeven point for 2017 = Fixed costs / Contribution margin ratio

= 19,410,000 / 0.32

= 60,656,250

------------------------------------------------------------------------

2.

Fixed Costs = 8,840,000 + 10,570,000 + 8,496,000 = 27,906,000

Variable costs = 33,276,000 + (70,800,000*9%) = 39,648,000

Contribution margin = Sales - Variable costs

= 70,800,000 - 39,648,000

= 31,152,000

Contribution margin ratio = Contribution margin / Sales * 100

= 31,152,000 / 70,800,000

= 44%

Breakeven point for 2017 = Fixed costs / Contribution margin ratio

= 27,906,000 / 0.44

= 63,422,727