Horton Manufacturing Incorporated $($HMI$)$ is suffering from the effects of increased local and global competition for its main product, a lawn mower that is sold in discount stores throughout the United States. The following table shows the results of HMI$$s operations for $2019$:

Sales $(17,000$ units @ $$84)$ $ $1,428,000$

Variable costs $(17,000$ @ $$63)1,071,000$

Contribution margin $ $357,000$

Fixed costs $390,600$

Operating profit $($loss$)$ $ $(33,600)$

Required:

$1.$ Compute HMI$$s breakeven point in both units and dollars. Also, compute the contribution margin ratio.

$2.$ What would be the required sales, in units and in dollars, to generate a pretax profit of $$30,000?$

$3.$ Assume an income tax rate of $40\%.$ What would be the required sales volume, in both units and dollars, to generate an after$-$tax profit of $$30,000?$

$4.$ Prepare a contribution income statement as a check for your calculations in requirement $3.$

$5.$ The manager believes that a $$60,000$ increase in advertising would result in approximately a $$200,000$ increase in annual sales. If the manager is right, what will be the effect on the company$$s operating profit or loss?

$6.$ Refer to the original data. The vice president in charge of sales feels that a $10\%$ reduction in price in combination with a $$61,000$ increase in advertising will cause unit sales to increases by $25\%.$ What effect would this strategy have on operating profit $($loss$)?$

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 $30,2022$:

Lionel Corporation

Budgeted Income Statement

For the Year Ending June $30,2022$

$($$$000$ omitted$)$

Sales $ $30,400$

Cost of goods sold

Variable $ $13,680$

Fixed $3,64817,328$

Gross profit $ $13,072$

Selling and administrative costs

Commissions $ $5,472$

Fixed advertising cost $912$

Fixed administrative cost $2,4328,816$

Operating income $ $4,256$

Fixed interest cost $760$

Income before income taxes $ $3,496$

Income taxes $(30\%)1,049$

Net income $ $2,447$

Since the completion of the income statement, Lionel has learned that its sales agents are requiring a $5\%$ increase in their commission rate $($to $23\%)$ for the upcoming year. As a result, Lionel$$s president has decided to investigate the possibility of hiring its own sales staff in place of the network of sales agents and has asked Alan Chen, Lionel$$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, at an average annual payroll cost for each employee of $$80,000,$ including fringe benefits expense. Travel and entertainment expenses are expected to total $$790,000$ for the year, and the annual cost of hiring a sales manager and sales secretary will be $$245,000.$ In addition to their salaries, the eight salespeople will each earn commissions at the rate of $10\%$ of sales. The president believes that Lionel also should increase its advertising budget by $$690,000$ if the eight salespeople are hired.

Question $2$:

$1.$ Determine Lionel$$s breakeven point $($operating profit $=0)$ in sales dollars for the fiscal year ending June $30,2022,$ if the company hires its own salesforce and increases its advertising costs. Prove this by constructing a contribution income statement.

$2.$ If Lionel continues to sell through its network of sales agents and pays the higher commission rate, determine the estimated volume in sales dollars that would be required to generate the operating profit as projected in the budgeted income statement.