Problem:
A Long Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 18% of sales. The income statement for the year ending December 31, 2012, is as follows.
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LONG BEAUTY CORPORATION
Income Statement
For the Year Ended December 31, 2012
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Sales
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$78,000,000
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Cost of goods sold
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Variable
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$35,100,000
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Fixed
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8,610,000
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43,710,000
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Gross margin
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$34,290,000
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Selling and marketing expenses
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Commissions
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$14,040,000
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Fixed costs
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10,260,000
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24,300,000
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Operating income
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$9,990,000
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The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 8% and incur additional fixed costs of $7.8 million.
Instructions
(a) Under the current policy of using a network of sales agents, calculate the Long Beauty Corporation's break-even point in sales dollars for the year 2012.
(b) Calculate the company's break-even point in sales dollars for the year 2012 if it hires its own sales force to replace the network of agents.
(c) Calculate the degree of operating leverage at sales of $78 million if (1) Long Beauty uses sales agents, and (2) Long Beauty employs its own sales staff. Describe the advantages and disadvantages of each alternative.
(d) Calculate the estimated sales volume in sales dollars that would generate an identical net income for the year ending December 31, 2012, regardless of whether Long Beauty Corporation employs its own sales staff and pays them an 8% commission or continues to use the independent network of agents. (CMA-Canada adapted)