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1. Babylon Corporation manufactures ice cream that is sold through a network of sales agents. The agents are paid a commission of 12,5% of sales.
1. Babylon Corporation manufactures ice cream that is sold through a network of sales agents. The agents are paid a commission of 12,5% of sales. Babylon Corporation Budgeted Income Statement For the Year Ended December 31, 2020 $1,260,000 Sales Cost of goods sold Variable 415,000 Fixed 95,000 Gross margin Selling and marketing expenses Commissions 157,500 Fixed costs 123,125 Operating income 510,000 750,000 280,625 $ 469,375 As an alternative, the company is considering to hire its own sales personnel and end the agreements with current sales agents. It will pay its salespeople a commission of 4 % and incur additional fixed costs of $105,000. (Therefore, its commissions expense will decrease to 4% of sales and fixed costs will increase by $105,000) (Hint: Prepare CVP I/S under current situation and under alternative) a. Under the current policy of using a network of sales agents, calculate the Babylon Corporation's break-even point in sales dollars for the year 2020. b. Calculate the company's break-even point in sales dollars for the year 2020 if it hires its own sales force to replace the network of agents. c. Calculate the margin of safety ratio if Babylon uses sales agents d. Calculate the margin of safety ratio if Babylon employs its own sales staff. e. Calculate the degree of operating leverage if Babylon uses sales agents f. Calculate the degree of operating leverage if Babylon employs its own sales staff
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