Diem Corporation manufactures fertilizer products that are sold through a network of external sales agents. The agents are paid a commission of 20% of revenues. Diem is considering replacing the sales agents with its own salespeople, who would be paid a commission of 15% of revenues and total salaries of $ 1,750,000. The income statement for the year ending December 31, 2012, under the two scenarios is shown here.

Required:
1. Calculate Diem’s 2012 contribution margin percentage, breakeven revenues, and degree of operating leverage under the two scenarios.
2. Describe the advantages and disadvantages of each type of sales alternative.
3. In 2013, Diem uses its own salespeople, who demand an 18% commission. If all other cost behavior pat-terns are unchanged, how much revenue must the salespeople generate in order to earn the same operating income as in2012?

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Diem Corporation Income Statement For the Year Ended December 31, 2012 Using Sales Agents Using Own Sales Force Revenues Cost of goods sold Variable Fixed Gross margin Marketing costs Commissions Fixed Operating income $35,000,000 $35,000,000 $19,250,000 19,250,000 4,750,000 4,750,000 24,000,000 11,000,000 24,000,000 11,000,000 7,000,000 1,450,000 5,250,000 3,200,000 8,450,000 8,450,000 2,550,000 2,550,000