Question

Company X manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission at a percent of sales basis. Partial income statement for the year ending Dec 31, 2017, is as follows: Item Amount (TL) Sales 78,000,000 COGS Variable 31,510,000 Fixed 8,610,000 Selling and marketing expenses Commissions 13,550,000 Fixed costs 10,270,000 The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 8.70% and incur additional fixed costs of TL7,550,000. Q-1) Calculate the degree of operating leverage at sales TL78,000,000 if the company uses sales agents. Q-2) Assume the company employs its own sales staff. Calculate the change in net income if sales decrease by 10%. Q-3) Calculate the estimated sales volume in sales TL that would generate an identical net income for the year ending December 31, 2017, regardless of whether the company uses sales agents or employs its own sales staff.

Answer 1

a)
Sales	$ 78,000,000.00
Less: Variable Cost (31510000 + 13,550,000)	$ 45,060,000.00
Contribution Margin	$ 32,940,000.00
Less: Fixed Cost (8610000 + 10,270,000)	$ 18,880,000.00
Net Operating Income	$ 14,060,000.00
Operating leverage = contribution margin / operating income
Operating leverage = 32,940,000 / 140600000	2.34
b)
Sales	$ 70,200,000.00
Less: Variable Cost (31510000 + 8.7% x 70200000)	$ 37,617,400.00
Contribution Margin	$ 32,582,600.00
Less: Fixed Cost (18880000 + 7,550,000)	$ 26,430,000.00
Net Operating Income	$   6,152,600.00
c)
Commission paid to agents = 13550000/78000000	17.37%
The sales level at which operating incomes will be identical is called the point of indifference. This would be when the cost of the network of agents (17.37% of sales) is exactly equal to the cost of paying employees 8.5% commission along with additional fixed costs of $7.55 million. None of the other costs is relevant, because they will not change between alternatives
Let the sales volume = S
17.37% X S = (8.7% X S) + $7,550,000
S = 7,550,000/(17.37% -8.7%)	$ 87,063,867.53