Chapter 3, Problem 3.48P

Choosing between compensation plans, operating leverage. (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.

1. 1. Calculate Zahner’s 2017 contribution margin percentage, breakeven revenue, and degree of operating leverage under the two scenarios.

Required

1. 2. Describe the advantages and disadvantages of each type of sales alternative.
2. 3. 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?