Klyne Corporation manufactures pharmaceutical products that are sold through a n
ID: 2510656 • Letter: K
Question
Klyne Corporation manufactures pharmaceutical products that are sold through a network of sales agents. The agents are paid a commission of 22% of sales. The income statement for the year ending December 31, 2017, is as follows KLYNE CORPORATION Income Statement For the Year Ending December 31, 2017 Sales 5 31,500,000 Cost of goods sold 5 17,840,000 Variable Fixed 2,830,000 20,270,000 Gross margin Selling and marketing expenses 11,230,000 8,190,00 2,045,000 Fixed costs 10,235,000 Operating income 5 995,000 Klyne is considering hiring its own sales staff to replace the network of agents. Klyne will pay its salespeople a commission of 15% and incur fixed costs of $2,091,000 Required: 1. Calculate Klyne Corporation's break-even point in sales dollars for the year 2017. Round your answer to 2 decimal places.) Break-even point 2. Calculate Klyne Corporation's break-even point in sales dollars for the year 2017 if the company had hired its own sales force to replace the network of agents. (Round your answer to 2 decimal places.) Break-even point 3. Calculate the degree of operating leverage at sales of $31,500,000, considering (a) Klyne uses sales agents and (b) Khyne employs its own staff. Describe the advantages and disadvantages of each alternative. (Round your answers to 2 decimal places.) Using sales agent Employing own sales staff 4. If Klyne increases the commission paid to its sales staff to 20%, keeping all other costs the same, how much revenue (in dollars) would Klyne have to generate to earn the same operating income it did in 2017? (Round your answer to 2 decimal places.) Revenue (in dollars)Explanation / Answer
Ans. 1 Calculation of Break even point for the year of 2017
Agent commission 22% of sales (31500000X.22) = 6930000
Actual commission paid for 2017 = 8190000
Other commission (8190000-6930000) = 1260000
Calculation of Fixed cost (2630000+2045000) = 4675000
Calculation of P/V ratio = Contribution/sales
Total Variable cost ( 17640000+8190000) = 25830000
Contribution (31500000-25830000) = 5670000
P/V Ratio = 5670000/31500000 = 18%
Break even point = 4675000/.18 = 25972222
2. Calculation of Break even point if Klyne hired its own staff
Fixed cost (2630000+2091000) = 4721000
Commission amt @15% = 31500000X.15 = 4725000
Other commission amt = 1260000
Total commissionamt = 5985000
other variable cost = 17640000
Total variable cost (17640000+5985000) = 23625000
Contribution (31500000-23625000) = 7875000
PV ratio = 7875000/31500000 = 25%
BEP = 4725000/.25 = 18900000
3. Degree of operating Leverage = Sales-VC/Sales-VC-FC
1. if kylne uses sales agent = 5670000/995000 = 5.70
2. if kylne uses its own sales staff =7875000/3154000 =2.50
4. Calculation of Desired Sales if klyne increase the commission
Calculation of Total commission is paid
Own staff @20% (31500000X.20) = 6300000
Other commission = 1260000
other V/c = 17640000
Total V/c = 25200000
Total Sales amt = 31500000
Contribution amt (31500000-25200000) = 6300000
PV ratio =6300000/31500000 = 20%
Desired Net income as same of 2017 = 995000
Desired sales/Revenue = Fixed cost+Desired profit / PV Ratio
All fixed as same of 2017 = 4675000
Desired Sales = (4675000+995000)/.20 = 28350000
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