Question

Problem 19-6A (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 20% 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 $76,400,000 Cost of goods sold     Variable $32,852,000     Fixed 8,720,000 41,572,000     Gross margin $34,828,000 Selling and marketing expenses     Commissions $15,280,000     Fixed costs 10,360,000 25,640,000     Operating income $9,188,000 The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 7% and incur additional fixed costs of $9,932,000. (a) Your answer is correct. Under the current policy of using a network of sales agents, calculate the Bonita Beauty Corporation’s break-even point in sales dollars for the year 2017. (Round intermediate calculations to 2 decimal places e.g. 10.25 and final answers to 0 decimal places, e.g. 2,510.) Break-even point $ 51,567,568 Click if you would like to Show Work for this question: Open Show Work SHOW SOLUTION SHOW ANSWER LINK TO TEXT Attempts: 1 of 5 used (b) Your answer is correct. Calculate the company’s break-even point in sales dollars for the year 2017 if it hires its own sales force to replace the network of agents. (Round intermediate calculations to 2 decimal places e.g. 10.25 and final answers to 0 decimal places, e.g. 2,510.) Break-even point $ 58024000 Click if you would like to Show Work for this question: Open Show Work SHOW SOLUTION SHOW ANSWER LINK TO TEXT Attempts: 2 of 5 used (c1) Calculate the degree of operating leverage at sales of $76,400,000 if (1) Bonita Beauty uses sales agents, and (2) Bonita Beauty employs its own sales staff. (Round answers to 2 decimal places, e.g. 1.25.) Degree of operating leverage (1) Bonita Beauty uses sales agents (2) Bonita Beauty employs its own sales staff

Answer 1

a
Fixed costs	19080000
Divide by Contribution margin ratio	37%	=28268000/76400000
Break-even point	51567568
b
Fixed costs	29012000
Divide by Contribution margin ratio	50%	=38200000/76400000
Break-even point	58024000
c1
Degree of operating leverage:
(1) Bonita Beauty uses sales agents	3.08
(2) Bonita Beauty employs its own sales staff	4.16

Workings:
	Sales agent	Own sales staff
Sales	76400000	76400000
Less: Variable costs
Cost of goods sold	32852000	32852000
Commissions	15280000	5348000
Total Variable costs	48132000	38200000
Contribution margin	28268000	38200000
Less: Fixed costs
Cost of goods sold	8720000	8720000
Selling and marketing expenses	10360000	20292000
Total Fixed costs	19080000	29012000
Operating income	9188000	9188000
	Sales agent	Own sales staff
Contribution margin	28268000	38200000
Divide by Operating income	9188000	9188000
Degree of operating leverage	3.08	4.16