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Bonita Beauty 75000000

Price: $2.50


Bonita Beauty Corporation manufactures cosmetic products that are sold through
a network of sales agents. The agents are paid a commission of 18% of sales. The income
statement for the year ending December 31, 2014, is as follows.

Bonita Beauty Corporation 
Income Statement 
For the Year Ended December 31, 2014 
Sales   75,000,000
Cost of goods sold
Variable   31,500,000
Fixed   8,610,000  40,110,000
Gross margin   34,890,000
Selling and marketing expenses
Commissions   13,500,000
Fixed costs   10,260,000  23,760,000
Operating income   11,130,000

The company is considering hiring its own sales staff to replace the network of agents. It
will pay its salespeople a commission of 8% and incur additional fixed costs of $7.5 million.

Instructions
(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 2014.
(b) Calculate the company’s break-even point in sales dollars for the year 2014 if it hires
its own sales force to replace the network of agents.
(c) Calculate the degree of operating leverage at sales of $75 million if (1) Bonita Beauty
uses sales agents, and (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, 2014, regardless of whether Bonita
Beauty Corporation employs its own sales staff and pays them an 8% commission or
continues to use the independent network of agents

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