Bonita Beauty Corporation manufactures cosmetic products that are sold through a

Question

Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 21% of sales. The income statement for the year ending December 31, 2017, is as follows.

BONITA BEAUTY CORPORATION
Income Statement
For the Year Ended December 31, 2017

The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 9% and incur additional fixed costs of $8,496,000.

a) Break even point for 2017

b) Breakeven point in sales dollars for the year 2017 if it hires its own sales force to replace network of agents

BONITA BEAUTY CORPORATION
Income Statement
For the Year Ended December 31, 2017

Sales $70,800,000 Cost of goods sold     Variable $33,276,000     Fixed 8,840,000 42,116,000     Gross margin $28,684,000 Selling and marketing expenses     Commissions $14,868,000     Fixed costs 10,570,000 25,438,000     Operating income $3,246,000

Explanation / Answer

1.

Fixed Costs = 8,840,000 + 10,570,000 = 19,410,000

Variable costs = 33,276,000 + 14,868,000 = 48,144,000

Contribution margin = Sales - Variable costs

= 70,800,000 - 48,144,000

= 22,656,000

Contribution margin ratio = Contribution margin / Sales * 100

= 22,656,000 / 70,800,000

= 32%

Breakeven point for 2017 = Fixed costs / Contribution margin ratio

= 19,410,000 / 0.32

= 60,656,250

------------------------------------------------------------------------

2.

Fixed Costs = 8,840,000 + 10,570,000 + 8,496,000 = 27,906,000

Variable costs = 33,276,000 + (70,800,000*9%) = 39,648,000

Contribution margin = Sales - Variable costs

= 70,800,000 - 39,648,000

= 31,152,000

Contribution margin ratio = Contribution margin / Sales * 100

= 31,152,000 / 70,800,000

= 44%

Breakeven point for 2017 = Fixed costs / Contribution margin ratio

= 27,906,000 / 0.44

= 63,422,727

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