Question

Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of  19% 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				$ 78,400,000
Cost of goods sold
Variable		$ 32,144,000
Fixed		9,000,000		41,144,000
Gross margin				$ 37,256,000
Selling and marketing expenses
Commissions		$ 14,896,000
Fixed costs		10,528,000		25,424,000
Operating income				$ 11,832,000

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 $ 7,840,000.

(B) Calculate the company’s break-even point in sales dollars for the year 2020 if it hires its own sales force to replace the network of agents.

Break-even point $ (C) Calculate the degree of operating leverage at sales of $78,300,000 if (1) Bonita uses a sales agent and (2) Bonita employes its own sales staff. (1) Bonita uses sales agents (2) Bonita uses its own sales staff (D) Calculate the estimated sales volume in sales dollars that would generate an identical net income for the year ending 12/31/2017 regardless of whether Bonita Co. employs its own sales staff and pays them an 8% sales commission or continue to use the independent network of agents. Estimated Sales Volume $

Answer 1

Option2: Bonita employs its own sales staff.
BONITA BEAUTY CORPORATION
Income Statement
For the Year Ended December 31, 2020
Sales		$78,400,000
Cost of goods sold
Variable	$32,144,000
Fixed	9,000,000	41,144,000
Gross margin		$37,256,000
Selling and marketing expenses
Commissions @ 9% of sales (78400000*9%)	$7,056,000
Fixed costs (10528000+7840000)	18,368,000	25,424,000
Operating income		$11,832,000

Break-even point in sales dollars
Fixed costs
Cost of goods sold	9,000,000
Selling and marketing expenses	18,368,000
Total fixed cost	27,368,000
Variable costs
Cost of goods sold	$32,144,000
Selling and marketing expenses	$7,056,000
Total Variable costs	$39,200,000
Sales	$78,400,000
Less: Total Variable costs	$39,200,000
Contribution margin	$      39,200,000
Contribution margin ratio (Contribution margin / Sales)	0.50
Total fixed cost	27,368,000
Contribution margin ratio (Contribution margin / Sales)	0.50
Break-even point in sales dollars (Total fixed cost / Contribution margin ratio)	$      54,736,000

Variable cost of goods sold		$32,144,000
Sales		$78,400,000
Variable cost of goods sold to sale ratio (32144000/78400000)		41.00%
Option1: Bonita uses a sales agent
Option2: Bonita employees its own sales staff.
Degree of operating leverage at sales of $78,300,000
	Option 1	Option 2
Sales	$78,300,000	$78,300,000
Less: Variable cost
Cost of goods sold (78300000*41%)	$32,103,000	32103000
Commissions (option 1 = 78300000*19%) (Option 2 = 78300000*9%)	14877000	7047000
Total variable cost	$46,980,000	$39,150,000
Contribution margin	$31,320,000	$39,150,000
Less: fixed cost
Cost of goods sold	9,000,000	9,000,000
Fixed costs	10528000	18,368,000
Total fixed cost	19,528,000	27,368,000
Operating profit	$11,792,000	$11,782,000
Degree of operating leverage
Contribution margin	31320000	39150000
Operating profit	11792000	11782000
Degree of operating leverage (Contribution / operating income)	2.65604	3.32287

Estimated sales volume in sales dollars that would generate an identical net income for the year ending 12/31/2017 regardless of whether Bonita Co. Employs its own sales staff and pays them an 8% sales commission or continue to use the independent network of agents.
Change in fixed cost	7,840,000
Change in sales commission (19%-8%)	11%
Estimated sales volume in sales (7840000/0.11	$ 71272727.27