CVP Analysis; Commissions; Ethics Lionel Corporation manufactures pharmaceutical productssold through a network of sales agents in the United States and Canada. The agents are currently paidan 18% commission on sales; that percentage was used when Lionel prepared the following budgetedincome statement for the fiscal year ending June 30, 2019:Lionel CorporationBudgeted Income StatementFor the Year Ending June 30, 2019($000 omitted)Sales $28,500Cost of goods soldVariable $12,825Fixed 3,500 16,325Gross profit $12,175Selling and administrative costsCommissions $ 5,130Fixed advertising cost 800Fixed administrative cost 2,150 8,080Operating income $ 4,095Fixed interest cost 705Income before income taxes $ 3,390Income taxes (30%) 1,017Net income $ 2,373Since the completion of the income statement, Lionel has learned that its sales agents are requiring a 5% increase in their commission rate (to 23%) for the upcoming year. As a result, Lionel’spresident has decided to investigate the possibility of hiring its own sales staff in place of the networkof sales agents and has asked Alan Chen, Lionel’s controller, to gather information on the costs associated with this change.Alan estimates that Lionel must hire eight salespeople to cover the current market area, at anaverage annual payroll cost for each employee of $80,000, including fringe benefits expense. Traveland entertainment expenses is expected to total $600,000 for the year, and the annual cost of hiring asales manager and sales secretary will be $150,000. In addition to their salaries, the eight salespeoplewill each earn commissions at the rate of 10% of sales. The president believes that Lionel also shouldincrease its advertising budget by $500,000 if the eight salespeople are hired.Required1. Determine Lionel’s breakeven point in sales dollars for the fiscal year ending June 30, 2019, if the company hires its own sales force and increases its advertising costs. Prove this by constructing a contribution income statement.
CVP Analysis; Commissions; Ethics Lionel Corporation manufactures pharmaceutical products
sold through a network of sales agents in the United States and Canada. The agents are currently paid
an 18% commission on sales; that percentage was used when Lionel prepared the following
income statement
Lionel Corporation
Budgeted Income Statement
For the Year Ending June 30, 2019
($000 omitted)
Sales $28,500
Cost of goods sold
Variable $12,825
Fixed 3,500 16,325
Gross profit $12,175
Selling and administrative costs
Commissions $ 5,130
Fixed advertising cost 800
Fixed administrative cost 2,150 8,080
Operating income $ 4,095
Fixed interest cost 705
Income before income taxes $ 3,390
Income taxes (30%) 1,017
Net income $ 2,373
Since the completion of the income statement, Lionel has learned that its sales agents are requiring a 5% increase in their commission rate (to 23%) for the upcoming year. As a result, Lionel’s
president has decided to investigate the possibility of hiring its own sales staff in place of the network
of sales agents and has asked Alan Chen, Lionel’s controller, to gather information on the costs associated with this change.
Alan estimates that Lionel must hire eight salespeople to cover the current market area, at an
average annual payroll cost for each employee of $80,000, including
and entertainment expenses is expected to total $600,000 for the year, and the annual cost of hiring a
sales manager and sales secretary will be $150,000. In addition to their salaries, the eight salespeople
will each earn commissions at the rate of 10% of sales. The president believes that Lionel also should
increase its advertising budget by $500,000 if the eight salespeople are hired.
Required
1. Determine Lionel’s breakeven point in sales dollars for the fiscal year ending June 30, 2019, if the company hires its own sales force and increases its advertising costs. Prove this by constructing a contribution income statement.
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