Question

Klyne Corporation manufactures pharmaceutical products that are sold through a network of sales agents. The agents are paid a commission of 25% of sales. The income statement for the year ending December 31, 2017, is as follows: KLYNE CORPORATION Income Statement For the Year Ending December 31, 2017 Sales $ 29,500,000 Cost of goods sold Variable Fixed $ 15,340,000 2,877,000 18,217,000 11,283,000 Gross margin Selling and marketing expenses Commissions Fixed costs 7,375,000 3,220.000 10,595,000 Operating income $ 688,000 Klyne is considering hiring its own sales staff to replace the network of agents. Klyne will pay its salespeople a commission of 15% and incur fixed costs of $2,087,000. Required: 1. Calculate Klyne Corporation's break-even point in sales dollars for the year 2017. (Round your answer to 2 decimal places.) Break-even point

Answer 1

1. Calculation of Break even sales at present situation,
   1. Formula is Fixed cost/Contribution ratio
      1. Contribution ratio = (sales-variable cost)/sales*100 = (29500000-(15340000+7375000))/29500000*100 = 23%
      2. Fixed cost = 2877000+3220000 = 6097000.
   2. Therefore Break even sales at present situation is 6097000/23% = $26,508,695.65.
2. Calculation of Break even sales at proposed situation,
   1. Revised Income Statement is as follows,

   2. Particulars	Amount $	Amount $
      Sales		29,500,000
      Cost of Goods Sold
      Variable	15,340,000
      Fixed	2,877,000	18,217,000
      Gross Margin		11,283,000
      Selling & Marketing Expenses
      Commissions (29500000*15%)	4,425,000
      Fixed costs (3220000+2087000)	5,307,000	9,732,000
      Operating Expenses		1,551,000

   3. Formula is Fixed cost/Contribution ratio
      1. Contribution ratio = (sales-variable cost)/sales*100 = (29500000-(15340000+4425000))/29500000*100 = 33%
      2. Fixed cost = 2877000+5307000 = 8184000.
   4. Therefore Break even sales at present situation is 8184000/33% = $24,800,000.
3. Calculation of Degree of Operating Leverage,
   1. Formula for calculating Degree of operating leverage if contribution/net income. (Contribution = sales - variable cost)
      1. Under present situation Degree of operating leverage = (29500000-(15340000+7375000))/688000 = 9.86%.
      2. Under Proposed situation Degree of operating leverage = (29500000-(15340000+4425000))/1551000 =6.28%.
4. Calculation of required sales to earn the same operating income,
   1. ​​​​​​​New contribution ratio after the increase of sales commission to 20% is as follows, (sales-variable cost)/sales * 100 = (29500000-(15340000+(29500000*20%)))/29500000 = 28%.
   2. Required sales to earn the desired profit is calculated by using the formula (Fixed cost + desired net income)/contribution ratio = (8184000(as calculated in 2) + 1551000)/28% = 3,47,67,857.14

The figures may vary slightly because of rounding off, but all the formulas and process is perfect, you can proceed with the same procedure in case the answer in not matching.