Question

Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 18% 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				$70,700,000
Cost of goods sold
Variable		$28,280,000
Fixed		8,810,000		37,090,000
Gross margin				$33,610,000
Selling and marketing expenses
Commissions		$12,726,000
Fixed costs		10,102,600		22,828,600
Operating income				$10,781,400

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 $5,656,000.

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 10% commission or continues to use the independent network of agents.

Estimated sales volume

Answer 1

Calculation of indifference point:-

The equation for current structure is-

Profit = Sales - variable cost(40% of sales) - sales commission(18% of sales) - Fixed costs(8810000 + 10102600)

Variable cost % is calculated by dividing given figures(28280000/70700000)

Equation for the proposed structure-

Profit - Sales - Variable cost(40% of sales) - Sales Commission (10% of sales) - Fixed costs(8810000 + 10102600 + 5656000)

Indifference point is where these both will be equal

Indifference Point:- let the sales be x

So, X - 0.4X - 0.18X - 18912600 = X - 0.4X - 0.1X - 24568600

~ 0.42X - 0.5X = 18912600 - 24568600

~ 0.08X = 5656000

~ X = 70700000

So at sales volume of $70700000 the company will generate identical net income