Kindle, Inc. manufactures cosmetic products that are sold through a network of s
ID: 2372659 • Letter: K
Question
Kindle, Inc. manufactures cosmetic products that are sold
through a network of sales agents. The agents are paid a commission of 12.5% of
sales. The income statement for the year ending December 31, 2013 is as
follows.
Sales $130,000
Cost of goods sold
Variable $58,500
Fixed 14,350 72,850
Gross margin 57,150
Selling and marketing expenses
Commissions $16,250
Fixed costs 17,100 33,350
Operating income 23,800
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 $13 million.
(A)
Under the current policy of using a network of
sales agents, calculate Kindle Incs break even point in sales dollars for the
year 2013.
(B)
Calculate the companys break-even point in
sales dollars for the year 2013 if it hires its own sales force to replace the
network of agents.
(C)
Calculate the degree of operating leverage at
sales of $ 130 million if (1) Kindle, Inc. uses sales agents and (2) Kindle
inc. employs its own sales staff.
Explanation / Answer
Total Fixed cost
= $ 14350 + $ 17100 = $31450
Variable cost = 12.5% + $58,500/$130,000 * 100% = 57.5%
Hence If X = Break-even point,
X = $31,450 + 57.5% * X
Hence, X = $74,000 = Answer a)
b) If it hires it%u2019s own sales force,
Total Fixed cost
= $ 14,350 + $ 17,100 + $ 13,000,000= $13031450
Variable cost = 10% + $58,500/$130,000 * 100% = 55%
Hence If X = Break-even point,
X = $13,031,450 + 55% * X
Hence X = Breakeven point = $ 28,958,777.78 = Answer b)
c) Now if sale = $130 million
Total Fixed cost when using sales agents:
= $ 14,350 + $ 17,100 + = $31450
Total variable cost = 57.5% * $130,000,000 = $ 74,750,000
Hence total cost = $ 74,781,450
Hence Operating income = $ 130,000,000 - $ 74,781,450 = $55,218,550
DOL = Total Contribution/ Operating income
Hence DOL = ($130,000,000 %u2013 $74,750,000)/ = $ 55,218,550 = 1.0005696 = Answer C1)
Total Fixed cost when using own sales force:
= $ 14,350 + $ 17,100 + $ 13,000,000= $13031450
Total variable cost = 55% * $130,000,000 = $ 71,500,000
Hence total cost = $ 84,531,450
Hence DOL = ($130,000,000 - $ 71,500,000)/ ($130,000,000 - $ 84,531,450) = 1.286604 = Answer C2)
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