Question

Use below information for Questions 1 to 3:

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 COGS	77,000,000
Variable	31,530,000
Fixed                                    Selling and marketing expenses	8,610,000
Commissions	13,570,000
Fixed costs	10,260,000

The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 8.60% and incur additional fixed costs of TL7,570,000.

1. Calculate the degree of operating leverage at sales TL77,000,000 if the company uses sales agents.
2. Assume the company employs its own sales staff. Calculate the change in net income if sales decrease by10%.
3. Calculate the estimated sales volume in sales TL that would generate an identical net income for the yearending December 31, 2017, regardless of whether the company uses sales agents or employs its own sales staff.

Answer 1

Solution:

Contribution Margin Income Statement - Sales Agents
Sales		77000000
Less: Variable Expenses
Manfacturing	31530000
Commissions to agents	13570000	45100000
Contribution Margin		31900000
Less: Fixed Expenses
Overhead	8610000
Marketing Expenses	10260000
		18870000
Net Income		13030000

Degree of Operating Leverage
= Contribution Margin / Operating Income
	Agents
Contribution Margin	31900000
Operating Income	13030000
DOL	2.45

Contribution Margin Income Statement - Own Sales Team
		10% Decrease	Current
Sales		69300000	77000000
Less: Variable Expenses
Manfacturing	28377000		31530000
Commissions to agents @ 8.60%	5959800	34336800	6622000
Contribution Margin		34963200	38848000
Less: Fixed Expenses
Overhead	8610000		8610000
Marketing Expenses	17830000		17830000
		26440000	26440000
Net Income		8523200	12408000

Change in Net Income = $12408000 - $8523200 = $3884800

	Agents	Own Team
Contribution Margin Ratio
Sales	77000000	69300000
Contribution Margin	31900000	34963200
Contribution Margin Ratio	41.4286%	50.4519%
Total Fixed Cost	18870000	26440000
Net Profit	(Sales*CM Ratio) - Fixed Costs	(Sales*CM Ratio) - Fixed Costs
	(Sales*41.43%)-18870000	(Sales*50.45%)-26440000
Here we want to equate both the above, as we the same profit at the same volume of sales
(Sales*41.43%)-18870000	=	(Sales*50.45%)-26440000
(Sales*50.45%)-(Sales*41.43%)	=	26440000-18870000
9.0234%*Sales	=	7570000
Sales	=	7570000/9.0234%
estimated sales volume in sales TL that would generate an identical net income	=	8,38,93,175.28