Peaches and Cream Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 16.25% of sales. The income statement for the year ending December 31, 2014, is shown on the next page.

The company is considering hiring its own sales staff to replace the network of agents.
It will pay its salespeople a commission of 10% and incur additional fixed costs of $12.0 million.

Instructions
(a) Under the current policy of using a network of sales agents, calculate the Peaches and Cream Corporation€™s break-even point in sales dollars for the year 2014.
(b) Calculate the company€™s break-even point in sales dollars for the year 2014 if it hires its own sales force to replace the network of agents.
(c) Calculate the degree of operating leverage at sales of $120 million if
(1) Peaches and Cream uses sales agents, and
(2) Peaches and Cream 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, 2014, regardless of whether Peaches and Cream Corporation employs its own sales staff and pays them a 10% commission as well as incurring additional fixed costs of $12.0 million, or continues to use the independent network ofagents.

Transcribed Image Text:

Peaches and Cream Corporation Income Statement For the Year Ended December 31, 2014 $120,000,000 Cost of goods sold $58,500,000 11,000,000 Variable Fixed Gross margin Commissions Fixed costs Operating income 69,500,000 50,500,000 Selling and marketing expenses 19,500,000 10,000,000 29.500,000 $ 21,000,000