Olin Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 18% of sales. The income statement for the year ending December 31, 2011, is as follows.

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 $7.8 million.

Instructions
(a) 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.
(b) 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.
(c) Calculate the degree of operating leverage at sales of $78 million if
(1) Olin Beauty uses sales agents,
(2) Olin Beauty employs its own sales staff. Describe the advantages and disadvantages of each alternative.
(d) 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.
(CMA-Canada adapted)

Transcribed Image Text:

OLIN BEAUTY CORPORATION Income Statement For the Year Ended December 31, 2011 Sales Cost of goods sold $78,000,000 Variable Fixed Gross margin $35,100,000 8,610,000 43,710,000 $34,290,000 Selling and marketing expenses $14,040,000 10,260,000 Commissions Fixed costs 24,300,000 $9,990,000 Operating income