Question

Problem 6-6A (Part Level Submission) 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 $74,800,000 Cost of goods sold Variable $33,660,000 Fixed 8,590,000 42,250,000 Gross margin $32,550,000 Selling and marketing expenses Commissions $15,708,000 Fixed costs 10,890,000 26,598,000 Operating income $5,952,000 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 $8,228,000.

(d) Calculate the estimated sales volume in sales dollars that would generate an identical net income for the year ending December 31, 2017, 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

Bonita Beauty Corporation
(d) Calculate the estimated sales volume in sales dollars that would generate an identical net
income for the year ending December 31, 2017, 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 $
The sales level at which operating incomes will be identical is called the point of indiFerence. This
would be when the cost of the network of agents (21% of sales) is exactly equal to the cost of paying
employees 10% commission along with additional Fixed costs of $8,228,000. None of the other costs is
relevant, because they will not change between alternatives.
Let the sales volume = S
21% x S = (10% x S) + $8,228,000
0.11S = 8228000
S = 74,800,000