company sells products. agents are paid 20% of sales. income statement with two

Question

company sells products. agents are paid 20% of sales. income statement with two scenarios;

using sales agents

sales 27,000,000

cogs

variable 12,420,000

fixed 2,650,000 15,070,000

gross margin 11,930,000

marketing costs

commissions 5,400,000

fixed costs 3,266,000 8,666,000

operating income 3,264,000

using own sales force

sales 27,000,000

cariable 12,420,000

fixed 2,650,000 15,070,000

gross margin 11,930,000

marketing costs

commissions 2,700,000

fixed costs 5,966,000 8,666,000

operating income 3,264,000

martin is considering hiring its own sales staff to replace the network of agents. martin will oay its salespeople a commission of 10% and incur additional costs of 2,700,000

1. begin by determining the formul , then enter the amounts to calculate the percentage

fixed costs/contribution margin x 100 = contribution margin %

using sales agents -------/-----------x100= %

using own sales force --------/---------x100=%

calculate 2011 breakeven point in revenues begin by determining the formula then enter the amounts to calculate breakeven points

-----------/----------------=breakeven revenues

using sales agents ----------/----------% =

using own sales force -----------/---------% =

calculate 2011 operating leverage

--------/---------- = operating leverage

using sales agents ---------/--------=

using own sales force--------/-----------=

2. advantages and disadvantages of each type of sales alternative

the calculations indicate that at sales of 27,000,000 a percentage change in sales and contribution margin will result in ------ times that perventage change in

(contribution margin,net income/operating income/variable expenses) if martin continues to use sales agents and ---- times that percentage change in (contribution margin,net income, operating income,variable expenses) if martin employs its own sales staff. the higher the contribution margin per dollar of sales and higher fixed costs gives martin (more / less) operating leverage, that is , (greater /less benefits) if revenues increase but greater / less risks if revenues decrease.

martin also needs to consider the skill levels and incentives under the two alternatives. (martins own sales force/sales agen have more incentive compensation and hence may be more motivated to increase sakes, on the other hand, martins own sales force/sales agent may be more knowledgeable and skilled in selling the companys products, that is the (manufacturing cost,sales price/ and sales volume itself will be affected by whi sells and by the nature of the compensation plan.

3. in 2012 martin uses its own salespeople, who demand a 15% commission. if all other cost behaviour patterns are unchanged how much revenue must the salespeople generate in order to earn the same operating income as in 2011

begin by stating the operating income equation

let r equal revenues needed to earn 3,264,000 in operating income and express the variable costs as a percent of r

_______-________-_______-________-______=3,264,000

the salespeople must generate revenue of $

Explanation / Answer

All Amounts in $ 1. Contribution Margins under the two scenarios Scenario I % of Sales Sales 27000000 100% Variable Costs COGS 12420000 Commission 5400000 17820000 66% Contribution Margin 9180000 34% Scenario II % of Sales Sales 27000000 100% Variable Costs COGS 12420000 Commission 2700000 15120000 56% Contribution Margin 11880000 44% 2. Breakeven Point is the sales value where Revenue = Costs Assuming the sales breakeven point in dollars as X Scenario I X = 0.66 X + ($ 2,650,000 + $ 3,266,000) Thus, 0.34X = $ 5,916,000 or X = $ 5,916,000 / 0.34 = 17400000 $ Scenario II X = 0.66 X + ($ 2,650,000 + $ 5,966,000) Thus, 0.34X = $ 8,616,000 or X = $ 8,616,000 / 0.34 = 25341176 $ Scenario I Operating Leverage = Contribution Margin / Net Operating Income = 9,180,000 / 3,264,000 = 2.81 Scenario II Operating Leverage = Contribution Margin / Net Operating Income = 11,880,000 / 3,264,000 = 3.64 3. If Martin uses its own salespeople who are demanding a commission of 15% against the existing 10% taken currently, The Operating Income under Scenario II (own sales staff) as given is $ 3,264,000 To retain this, the sales will be calculated as under : Assuming the sales as X COGS are 46% of X Commission is 15% of X Fixed Expenses (refer 2 above) are $ 8,616,000 Thus, X - 0.46X - 0.15X - $ 8,616,000 = $ 3,264,000 Hence, 0.39X = $ 3,264,000 + $ 8,616,000 = $ 10,880,000 Therefore X = $ 10,880,000 / 0.39 = 27897436 $

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