Lionel Corporation manufactures pharmaceutical products soldthrough a network of sales agents in the United States and Canada.The agents are currently paid an 18% commission on sales; thatpercentage was used when Lionel prepared the following budgetedincome statement for the fiscal year ending June 30, 2019
| Lionel Corporation |
| Budgeted Income Statement |
| For the Year Ending June 30, 2019 |
| ($000 omitted) |
| Sales | | | | $ | 29,000 | |
| Cost of goods sold | | | | | | |
| Variable | $ | 13,050 | | | | |
| Fixed | | 3,480 | | | 16,530 | |
| Gross profit | | | | $ | 12,470 | |
| Selling and administrative costs | | | | | | |
| Commissions | $ | 5,220 | | | | |
| Fixed advertising cost | | 870 | | | | |
| Fixed administrative cost | | 2,320 | | | 8,410 | |
| Operating income | | | | $ | 4,060 | |
| Fixed interest cost | | | | | 725 | |
| Income before income taxes | | | | $ | 3,335 | |
| Income taxes (30%) | | | | | 1,001 | |
| Net income | | | | $ | 2,335 | |
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Since the completion of the income statement, Lionel has learnedthat its sales agents are requiring a 5% increase in theircommission rate (to 23%) for the upcoming year. As a result,Lionel’s president has decided to investigate the possibility ofhiring its own sales staff in place of the network of sales agentsand has asked Alan Chen, Lionel’s controller, to gather informationon the costs associated with this change.
Alan estimates that Lionel must hire eight salespeople to coverthe current market area, at an average annual payroll cost for eachemployee of $80,000, including fringe benefits expense. Travel andentertainment expenses is expected to total $650,000 for the year,and the annual cost of hiring a sales manager and sales secretarywill be $175,000. In addition to their salaries, the eightsalespeople will each earn commissions at the rate of 10% of sales.The president believes that Lionel also should increase itsadvertising budget by $550,000 if the eight salespeople arehired.
Required
1. Determine Lionel’s breakeven point (operating profit = 0) insales dollars for the fiscal year ending June 30, 2019, if thecompany hires its own sales force and increases its advertisingcosts. Prove this by constructing a contribution incomestatement.
2. If Lionel continues to sell through its network of salesagents and pays the higher commission rate, determine the estimatedvolume in sales dollars that would be required to generate theoperating profit as projected in the budgeted income statement.
REQUIREMENT 1
Determine Lionel’s breakeven point (operating profit = 0) insales dollars for the fiscal year ending June 30, 2019, if thecompany hires its own sales force and increases its advertisingcosts. Prove this by constructing a contribution income statement.(Do not round intermediate calculations. Enter your answers inthousands of dollars.)
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| | Breakeven point (in sales dollars) | | | | Contribution Income Statement | | | | | Variable costs: | | | | | | | | | | | $0 | | | $0 | | Fixed costs: | | | | | | | | | | | $0 | | | $0 |
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If Lionel continues to sell through its network of sales agentsand pays the higher commission rate, determine the estimated volumein sales dollars that would be required to generate the operatingprofit as projected in the budgeted income statement. (Do not roundintermediate calculations. Enter your answers in thousands ofdollars.)
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| | Estimated volume (in salesdollars) | Â Â |
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