9-43 CVP Analysis; Commissions; Ethics Lionel Corporation manufactures pharmaceutical products sold through a network of sales agents in the United States and Canada. The agents are currently paid an 18% commission on sales; that percentage was used when Lionel prepared the following budgeted income statement for the fiscal year ending June 30, 2019 Lionel Corporation Budgeted Income Statement For the Year Ending June 30, 2019 ($000 omitted) $28,500 Sales Cost goods sold Variable $12,825 3.500 Fixed 16,325 Gross profit $12.175 Selling and administrative costs $ 5.130 Commissions Fixed advertising cost 800 Fixed administrative cost 2.150 8,080 Operating income $ 4,095 Fixed interest cost 705 Income before income taxes $3,390 Income taxes (30%) 1.017 Net income $2,373 their commission rate (to 23%) for the upcoming year. As a result, Lionel's president has decided to investigate Since the completion of the income statement, Lionel has learned that its sales agents are requiring a 5 % increase the possibility of hiring its own sales staff in place of the network of sales agents and has asked Alan Chen, Lionel's controller, to gather information on the costs associated with this change. Alan estimates that Lionel must hire eight salespeople to cover the current market area, expected to total $600,000 for the year, and the annual cost of hiring a sales manager and sales secretary will be $150,000. In addition to their salaries, the eight salespeople will cach carn commissions at the rate of 10 % of sales. The president believes that Lionel also should increase its advertising budget by $500,000 if the eight salespeople are hired. $80,000, including fringe benefits expense. Travel and entertainment expenses is an average annual payroll cost for each employee Required 1. Determine Lionel's breakeven point statement. sales dollars for the fiscal year ending June 30, 2019, the company hires its own sales force and increases its advertising costs. Prove this by constructing a contribution income page 349 sales dollars that would be required to generate the operating profit as projected. 2. If Lionel continues in the budgeted income statement. sell through its network of sales agents and pays the higher commission rate, determine the estimated volume 3. Describe the general assumptions underlying breakeven analysis that may limit its usefulness. sales for the firm to either accept the agents' demand 4. What is the indifference point r adopt the proposed change? Which plan is better for the firm? Why? 5. What are the ethical issues, if any, that Alan should consider