Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 19% of sales. The income statement for the year ending December 31, 2017, is as follows.
BONITA BEAUTY CORPORATION Income Statement For the Year Ended December 31, 2017
| Sales |
$78,400,000 |
| Cost of goods sold |
| Variable |
$33,712,000 |
| Fixed |
9,000,000 |
42,712,000 |
| Gross margin |
$35,688,000 |
| Selling and marketing expenses |
| Commissions |
$14,896,000 |
| Fixed costs |
10,530,000 |
25,426,000 |
| Operating income |
$10,262,000 |
The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 9% and incur additional fixed costs of $7,840,000.
(a) Under the current policy of using a network of sales agents, calculate the Bonita Beauty Corporation's break-even point in sales dollars for the year 2017. (Round intermediate calculations to 2 decimal places e.g. 10.25 and final answers to 0 decimal places, e.g. 2,510.)
(b) Calculate the company's break-even point in sales dollars for the year 2017 if it hires its own sales force to replace the network of agents. (Round intermediate calculations to 2 decimal places e.g. 10.25 and final answers to 0 decimal places, e.g. 2,510.)
(c) Calculate the degree of operating leverage at sales of $78,400,000 if (1) Bonita Beauty uses sales agents, and (2) Bonita Beauty employs its own sales staff. (Round answers to 2 decimal places, e.g. 1.25.)
Degree of operating leverage
(1) Bonita Beauty uses sales agents
(2) Bonita Beauty employs its own sales staff
(d) Calculate the estimated sales volume in sales dollars that would generate an identical net income for the year ending December 31, 2017, regardless of whether Bonita Beauty Corporation employs its own sales staff and pays them an 9% commission or continues to use the independent network of agents.