Kindle, Inc. manufactures cosmetic products that are sold through a network of s
ID: 2485507 • 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, 2016, is as follow.
KINDLE, INC.
Income Statement
Year Ending December 31, 2016
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, Inc.'s break-even point in sales dollars for the year 2016.
(b) Calculate the company's break-even point in sales dollars for the year 2016 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
a. Break-even point = Fixed costs / Contribution margin ratio = $ 31,450 / 0.425 = $ 74,000
b. Break-even point = Fixed costs / Contribution margin ratio = $ 44,450 / 0.45 = $ 98,778
c. Degree of operating leverage:
Degree of operating leverage ( DOL) = Contribution margin / EBIT
Sales agents Own sales staff Sales 130,000 130,000 Variable costs 74,750 71,500 Contribution margin 55,250 58,500 Fixed costs 31,450 44,450 EBIT 23,800 14,050 DOL 2.32 4.16Related Questions
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