(CMA, adapted) Zahner Corporation manufactures housewares products that are sold through a network of external sales agents. The agents are paid a commission of 20% of revenues. Zahner is considering replacing the sales agents with its own salespeople, who would be paid a commission of 10% of revenues and total salaries of $3,520,000. The income statement for the year ending December 31, 2017, under the two scenarios is shown here. Home Insert Page Layout Formulas Data Review View Zahner Corporation Income Statement For the Year Ended December, 2017 Using Sales Agents $35,200,000 3 Using Own Sales Force $35,200,000 5 Revenues 6 Cost of goods sold Variable $13,375,000 4,125,000 17,500,000 17,700,000 $13,375,000 4,125,000 17,500,000 Fixed 9 Gross margin 10 Marketing costs Commissions 17,700,000 $ 7,040,000 4,025.000 11,065,000 S 6,635.000 $ 3,520,000 7,545,000 11 11,065,000 S 6,635,000 Fixed costs 12 13 Operating income
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
In 2018, Zahner uses its own salespeople, who demand a 15% commission. If all other cost-behavior patterns are unchanged, how much revenue must the salespeople generate in order to earn the same operating income as in 2017?
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