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    Case 5-32&33

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    Majde Qasem
    1. The break-even point in sales for each distribution method is calculated based on the contribution margin ratio. Using a 15% commission, break-even sales are $12 million. At 20% commission, break-even sales are $13.7 million. With its own sales force, break-even sales are $15 million. 2. To attain a target net income of $1.12 million, sales must be $16.8 million. Sales of $18.6 million would yield equal net income under the 20% commission plan and own sales force plan. 3. The company should continue using sales agents for at least one more year and possibly two more years due to less risk and greater

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    Case 5-32&33

    Uploaded by

    Majde Qasem
    129 views4 pages
    1. The break-even point in sales for each distribution method is calculated based on the contribution margin ratio. Using a 15% commission, break-even sales are $12 million. At 20% commission, break-even sales are $13.7 million. With its own sales force, break-even sales are $15 million. 2. To attain a target net income of $1.12 million, sales must be $16.8 million. Sales of $18.6 million would yield equal net income under the 20% commission plan and own sales force plan. 3. The company should continue using sales agents for at least one more year and possibly two more years due to less risk and greater

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    (CASE 5–32&33)

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    1. The break-even point in sales for each distribution method is calculated based on the contribution margin ratio. Using a 15% commission, break-even sales are $12 million. At 20% commission, break-even sales are $13.7 million. With its own sales force, break-even sales are $15 million. 2. To attain a target net income of $1.12 million, sales must be $16.8 million. Sales of $18.6 million would yield equal net income under the 20% commission plan and own sales force plan. 3. The company should continue using sales agents for at least one more year and possibly two more years due to less risk and greater

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    129 views4 pages

    Case 5-32&33

    Uploaded by

    Majde Qasem
    1. The break-even point in sales for each distribution method is calculated based on the contribution margin ratio. Using a 15% commission, break-even sales are $12 million. At 20% commission, break-even sales are $13.7 million. With its own sales force, break-even sales are $15 million. 2. To attain a target net income of $1.12 million, sales must be $16.8 million. Sales of $18.6 million would yield equal net income under the 20% commission plan and own sales force plan. 3. The company should continue using sales agents for at least one more year and possibly two more years due to less risk and greater

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    Majde Qasem (120192712) CASE 5–32&33

    1- The overall break-even sales can be determined using


    the CM ratio.

    Velcro Metal Nylon Total


    Sales 165000 $ 300000 $ 340000 $ 805000 $
    Variable expenses 125000 $ 140000 $ 100000 $ 365000 $
    Contribution Margin
    Fixed expenses 400000
    Net operating income 40000 $

    CM ratio = Contribution margin \ Sales

    = 440000 $ \ 805000 $

    = 0.5466

    Dollar sales to break-even = Fixed expenses \ CM ratio

    = 400000 $ \ 0.5466

    = 732000 $ ( rounded )

    2- The issue is what to do with the common fixed cost when


    computing the break-even for the individual products .
    The correct approach is to ignore the common fixed costs.
    If the common fixed costs are included in computations ,
    the break-even points will be overstated for individual
    products and managers may drop products in fact are
    profitable.
    Majde Qasem (120192712) CASE 5–32&33

    a. The break-even points can be computed using the


    contribution margin approach as follows :

    Velcro Metal Nylon


    Unit selling price 1.65 $ 1.50 $ 0.85 $
    Variable cost per unit 1.25 0.70 $ 0.25 $
    Unit contribution margin (a) 0.40 $ 0.80 $ 0.60 $

    Product fixed expenses (b) 20000 $ 80000 $ 60000 $


    Unit sales to break even (b)\(a) 50000 100000 10000

    b.

    Velcro Metal Nylon Total


    Unit Sales 50000 100000 100000
    Sales 82500 $ 150000 $ 85000 $ 317500 $
    Variable expenses 62500 70000 25000 157500
    Contribution margin 20000 $ 80000 $ 60000 $ 160000
    Fixed expenses 40000 $
    Net operating loss 240000 $

    hence, the overall loss of the company is 240000$

    In the case the company sales the break-even quantity of each


    product, each product will show zero segments net income and
    the common fixed expense will remain as a net operating loss
    Majde Qasem (120192712) CASE 5–32&33

    15% commission 15% commission Own Sales Force


    Sales 16000 $ 100% 16000$ 100% 160000$ 100%
    Variable expenses
    Manufacturing 7200 7200 720000
    Commission 2400 3200 120000
    Total variable expenses 9600 60% 10400 65% 840000 52.5%
    Contribution margin 6400 40% 5600 35% 760000 47.5%
    Fixed expenses
    Manufacturing overhead 2340 2340 234000
    Marketing 120 120 252000**
    Administrative 1800 1800 172500***
    Interest 540 540 54000
    Total fixed expenses 4800 4800 712500
    Income before income 1600 800 47500
    taxes
    Income taxes(30%) 480 240 14250
    Net income 1120$ 560$ 332.50$
    ** 120000$ + 2400000$ = 2520000$

    ***1800000$ - 75000$ = 1725000$

    1. When the income before taxes is zero, income taxes will also be zero and net
    income will be zero. Therefore, the break-even calculations can be based on the
    income before taxes.

    a. Break-even point in dollar sales if the commission remains 15%


    Dollar sales to break-even = fixed expenses \ CM ratio
    = 4800000$ \ 0.40
    = 12000000$
    b. Break-even point in dollar sales if the commission remains 20%
    Dollar sales to break-even = fixed expenses \ CM ratio
    = 4800000$ \ 0.35
    = 13714286$
    c. Break-even point in dollar sales if the company employs its own sales force
    Dollar sales to break-even = fixed expenses \ CM ratio
    = 7125000$ \ 0.475
    = 15000000$

    2. In order to generate a 1120000$ net income, the company must generate


    1600000$ in income before taxes. Therefore
    Dollar sales to attain target = target income before taxes + fixed expenses \ CM ratio
    = 1600000$ + 4800000$ \ 0.35
    = 6400000$ \ 0.35 = 18285741$
    Majde Qasem (120192712) CASE 5–32&33

    3. To determine volume of sales at which net income would be equal under either the
    20% commission plan or the company sales force plan, we find the volume of sales
    where costs before income taxes under the two plans are equal
    X = Total sales revenue
    0.65X +4800000$ = 0.525X + 7125000$
    0.125X = 2325000$
    X = 2325000$ \ 0.125
    X = 18600000$
    Thus, at a sales level of 18600000$ either plan would yield the some income before
    taxes and net income. Below this sales level, the commission plan would yield the
    largest net income: above this sales level, the sales force plan yiled the largest net
    income.

    4. A,B and C

    15% 20% Own


    Commission Commission Sales Force
    Contribution margin (a) 6400000$ 5600000$ 7600000$
    Income before taxes (b) 1600000$ 800000$ 475000$
    Degree of operating leverage 4 7 16
    (a)\(b)

    5. We would continue to use the sales agents for at least one more year, and possibly
    for two more years. The reasons are as follows:

    First, use of the sales agents would have a less dramatic effect on net income.

    Second, use of the sales agents for at least one more year would give the company
    more time to hire competent people and get the sales group organized.

    Third, the sales force plan doesn’t become more desirable than the use of sales
    agents until the company reaches sales of 1860000$ a year. This level probably
    won't be reached for at least one more year, and possibly two years.

    Fourth, the sales force plan will be highly leveraged since it will increase fixed costs
    and decrease variable costs. One or two years from now, when sales have reached
    the 18600000 level, the company can benefit greatly from this leverage. For the
    moment, profits will be greater and risk will be less by staying with the agents, even
    at the higher 20% commission rate.

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