TWT20120731189_f_1

AP6-6A

Olin Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 16% of sales. The income statement for the year ending December 31, 2011, is as follows.

OLIN BEAUTY CORPORATION

Income Statement

For the Year Ended December 31, 2011

Sales \$77,807,000

Cost of goods sold

Variable \$35,984,000

Fixed 8,677,000 44,661,000

Gross margin \$33,146,000

Selling and marketing expenses

Commissions \$12,449,120

Fixed costs 10,565,000 23,014,120

Operating income

\$10,131,880

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 \$6,224,560.

Incorrect.

Under the current policy of using a network of sales agents, calculate the Olin Beauty Corporation’s break-even point in sales dollars for the year 2011. (Round computation for contribution margin ratio to 0 decimal places, e.g. 25%. Round the answer to 0 decimal places, e.g. 125.)

Break-even point in sales dollars \$

Incorrect.

Calculate the company’s break-even point in sales dollars for the year 2011 if it hires its own sales force to replace the network of agents. (Round computation for contribution margin ratio to 0 decimal places, e.g. 25%. Round the answer to 0 decimal places, e.g. 125.)

Break-even point in sales dollars \$

Incorrect.

Calculate the degree of operating leverage at sales of \$77,807,000 if (1) Olin Beauty uses sales agents, and (2) Olin Beauty employs its own sales staff. (Round answers to 2 decimal places, e.g. 10.50.)

Uses sales agents

Employs its own sales staff

Incorrect.

Calculate the estimated sales volume in sales dollars that would generate an identical net income for the year ending December 31, 2011, regardless of whether Olin 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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