Question

Home Insert Design Layout References Mailings Review View $130,000 Income Statement Year Ending December 31, 2016 Sales Cost of goods sold Variable $58,500 Fixed 14,350 Gross margin Selling and marketing expenses Commissions $16,250 Fixed costs 17,100 Operating income 72,850 57,150 33,350 $ 23.800 The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 10% and incur additional fixed costs of $13 million. Instructions (a) Under the current policy of using a network of sales agents, calculate Kindle, Inc.'s break- even point in sales dollars for the year 2016. (b) Calculate the company's break-even point in sales dollars for the year 2016 if it hires its own sales force to replace the network of agents. (c) Calculate the degree of operating leverage at sales of $130 million if (1) Kindle, Inc. uses sales agents, and (2) Kindle, Inc. employs its own sales staff.

Answer 1

(a). Break-even point in sales dollars under current policy = $74000

Explanation;

Formula of break even is as follow;

Break-even in sales dollars = (Fixed costs / pv ratio

Sales = $130,000

Variable costs = 58500 + 16250 = 74750

Contribution = 130000 - 74750 = 55250

pv ratio = 55250 / 130000 = 0.425

Break-even in sales dollars = 31450 / 0.425 = 74000

part b)

Break even point in sales dollars = Total Fixed Cost/ Contribution Margin

Total Fixed Cost = 14350+17100+13000=44450

Contribution Margin Ratio= Sales - Variable Cost / Sales

=130000- (58500+13000)/130000

=58500/130000

= 0.45

Break Even Point in Sales = 44450/0.45 = 98777.78 = $98778

c. Degree of operating leverage:

	Sales agents	Own sales staff
Sales	130,000	130,000
Variable costs	74,750	71,500
Contribution margin	55,250	58,500
Fixed costs	31,450	44,450
EBIT	23,800	14,050
DOL	2.32	4.16

Degree of operating leverage ( DOL) = Contribution margin / EBIT