Pear and Crease Corporation ("P&C") manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 16.25% of sales. This is option A, with forecast income statement for the year ending December 31, 2020 appended below:

PEAR AND CREASE CORPORATION

Forecast Income Statement

For the Year Ending December 31, 2020

Sales $120,000,000

Cost of goods sold

Variable $58,500,000

Fixed 11,000,000 69,500,000

Gross margin 50,500,000

Selling and marketing expenses

Commissions 19,500,000

Fixed costs 10,000,000 29,500,000

Operating income $21,000,000

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. The additional fixed costs will be used to expand the sales floor area. This is option B.

(a) Under the current policy of using a network of sales agents (option A), calculate P&C's break-even point in sales dollars for the year 2020.

(b) Calculate P&C's break-even point in sales dollars for the year 2020 if it hires its own sales force (option B) to replace the network of agents. Based on the difference in break-even points between options A and B, provide an analysis about the retention (option A) or replacement (option B) of the network of agents. Explain which one is preferable?

(c) Calculate the target sales values in dollars that would generate an identical net income for the year ending December 31, 2020, regardless of whether P&C employs its own sales staff and pays them a 10% commission as well as incurring additional fixed costs of $12.0 million (option B), or continues to use the independent network of agents (option A).

(d) Provide a recommendation to P&C about retention (option A) or replacement (option B) of the network of agents if the sales level in the year 2020 is forecast to be higher than the target sales value [what you calculated in (c) above]. You have to address the issue of contribution margin in your recommendation.