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1. (8 points) AgroPharm Corporation manufactures pharmaceutical products that are sold through a network of external sales agents. The agents are paid a commission of 18% of revenues. AgroPharm is considering replacing the sales agents with its own salespeople, who would be paid a commission of 12% of revenues and total salaries of $7,950,000. The income statement for the year ending December 31, 20x7, under the two scenarios is shown here. AgroPharm Corporation Income Statement For the Year Ended December 31, 20x7 Using Sales Agents Using Own Sales Force Revenues $45,000,000 $45,000,000 Cost of goods sold Variable $15,750,000 $15,750,000 Fixed 5,425,000 21,175,000 5,425,000 21,175,000 Gross margin $23,825,000 $23,825,000 Marketing costs Commissions $8,100,000 $5,400,000 Fixed costs 5,250,000 13,350,000 7,950,000 13,350,000 Operating income $10,475,000 $10,475,000 a. (6 points) Calculate AgroPharm's 20x7 contribution margin percentage, breakeven revenues, and degree of operating leverage under the two scenarios. b. (2 points) In 20x8, AgroPharm uses its own salespeople, who demand a 14% commission. If all other cost-behavior patterns are unchanged, how much revenue must the salespeople generate in order to earn the same operating income as in 20x7

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