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 budgeted income statement for the fiscal year ending June 30, 2022: Lionel Corporation Budgeted Income Statement For the Year Ending June 30, 2022 ($000 omitted) Sales $ 30,000 Cost of goods sold Variable $ 13,500 3,600 17,100 $ 12,900 Fixed Gross profit Selling and administrative costs Commissions $ 5,400 Fixed advertising cost 900 Fixed administrative cost 2,400 8,700 Operating income $ 4,200 Fixed interest cost 750 $ 3,450 1,035 Income before income taxes Income taxes (30%) Net income $ 2,415 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 fringe benefits expense. Travel and entertainment expenses are expected to total $750,000 for the year, and the annual cost of hiring a sales manager and sales secretary will be $225,000. 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 $650,000 if the eight salespeople are hired. Required: 1. Determine Lionel's breakeven point (operating profit = 0) in sales dollars for the fiscal year ending June 30, 2022, if the company hires its own salesforce and increases its advertising costs. Prove this by constructing a contribution income statement. 2. If Lionel continues to sell through its network of sales agents and pays the higher commission rate, determine the estimated volume in sales dollars that would be required to generate the operating profit as projected in the budgeted income statement.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question
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 budgeted
income statement for the fiscal year ending June 30, 2022:
Lionel Corporation
Budgeted Income Statement
For the Year Ending June 30, 2022
($000 omitted)
Sales
$ 30,000
Cost of goods sold
$ 13,500
3,600
Variable
Fixed
17,100
Gross profit
Selling and administrative costs
$ 12,900
Commissions
$ 5,400
Fixed advertising cost
900
Fixed administrative cost
2,400
8,700
Operating income
$ 4,200
Fixed interest cost
750
$ 3,450
1,035
$ 2,415
Income before income taxes
Income taxes (30%)
Net income
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 fringe benefits expense. Travel and entertainment expenses are expected to total $750,000 for the
year, and the annual cost of hiring a sales manager and sales secretary will be $225,000. 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 $650,000 if the eight salespeople are hired.
Required:
1. Determine Lionel's breakeven point (operating profit = 0) in sales dollars for the fiscal year ending June 30, 2022, if the company
hires its own salesforce and increases its advertising costs. Prove this by constructing a contribution income statement.
2. If Lionel continues to sell through its network of sales agents and pays the higher commission rate, determine the estimated volume
in sales dollars that would be required to generate the operating profit as projected in the budgeted income statement.
Transcribed Image Text: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 budgeted income statement for the fiscal year ending June 30, 2022: Lionel Corporation Budgeted Income Statement For the Year Ending June 30, 2022 ($000 omitted) Sales $ 30,000 Cost of goods sold $ 13,500 3,600 Variable Fixed 17,100 Gross profit Selling and administrative costs $ 12,900 Commissions $ 5,400 Fixed advertising cost 900 Fixed administrative cost 2,400 8,700 Operating income $ 4,200 Fixed interest cost 750 $ 3,450 1,035 $ 2,415 Income before income taxes Income taxes (30%) Net income 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 fringe benefits expense. Travel and entertainment expenses are expected to total $750,000 for the year, and the annual cost of hiring a sales manager and sales secretary will be $225,000. 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 $650,000 if the eight salespeople are hired. Required: 1. Determine Lionel's breakeven point (operating profit = 0) in sales dollars for the fiscal year ending June 30, 2022, if the company hires its own salesforce and increases its advertising costs. Prove this by constructing a contribution income statement. 2. If Lionel continues to sell through its network of sales agents and pays the higher commission rate, determine the estimated volume in sales dollars that would be required to generate the operating profit as projected in the budgeted income statement.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps with 6 images

Blurred answer
Knowledge Booster
Risk Analysis
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education