This is a graded discussion: 10 points possible Chapter 5 Discussion Board Case Study A+ Chapter 5 Case Study - Cost Structure, Break-Even, and Target Profit Analysis Read the scenario below and follow the Required directions. due Sep 25 Brothers Company, LLC is a manufacturer of telecommunications equipment. To market its products, the company uses independent sales agents. The agents are paid a sales commission of 15% of the selling price of all items sold. Laura Lee, Brothers Company, LLC's controller, has just prepared the company's budgeted income statement for next year as follows: Brothers Company, LLC Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses: Variable Fixed overhead $ 16,000,000 $ 7,200,000 2,340,000 9,540,000 6,460,000 Vet.org Gross margin Selling and administrative expenses: Commissions to agents Fixed marketing expenses 2,400,000 Fixed administrative expenses 120,000* 1,800,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) Net income *Primarily depreciation on storage facilities. 4,320,000 2,140,000 540,000 1,600,000 480,000 $ 1,120,000 corporate financeinstitute.com 30 30 As Laura handed the statement to Nicholas Adam, Brothers' president, she commented, "I went ahead and used the agents' 15% commission rate in completing these statements, but I have received an email indicating the current agents refuse to sell our products next year unless we increase the commission rate to 20%." "That seems excessive." Nicholas replied hastily. "I thought our commissions were at the high range of industry standard. How do they defend a 20% commission rate?" "They claim that after paying for advertising, travel, and the other costs of promotion, there's nothing left over for profit," replied Laura. "I'm not sure I agree." retorted Nicholas. "If we employ our own sales force, we might have more control. Can you pull together some cost figures for us to review?" "I already have them." said Laura. "Several other telecommunication manufacturing companies I researched pay a 7.5% commission to their own salespeople, along with a small salary. Of course, we would have to cover all promotion costs, too. I figure our fixed expenses would increase by $2,400,000 per year, but that would be more than offset by the $3,200,000 (20% x $16,000,000) that we would avoid on agents' commissions." The breakdown of the $2,400,000 cost follows: Salaries: Sales manager Salespersons Travel and entertainment Advertising Total $ 100,000 600,000 400,000 1,300,000 $2,400,000 "Great!" replied Nicholas. "And I noticed that the $2,400,000 equals what we're paying the agents under the old 15% commission rate." "It's even better than that," explained Laura. "We can save $75,000 a year because that's the fee we pay our auditors to verify the agents' reports. So, our overall administrative expenses would be less." "Prepare a schedule of your analysis and we'll discuss this during the executive committee tomorrow," said Nicholas. "With the approval of the committee, we can move on the matter immediately." Required: Part 1: Download table below. Complete. Ch 5 Case Study Table.docx+ Part 2: Post your answers to the following questions, YOU MUST NUMBER YOUR ANSWERS TO MATCH THE QUESTIONS. Use the information from your completed table and answer questions 1-5. 1. Compute Brothers Company, LLC's break-even point in dollar sales for next year assuming: a. at 15% commission rate b. at 20% commission rate c. employs its own sales force 2. Assume that Brothers Company, LLC decides to continue selling through agents and pays the 20% commission rate. Determine the dollar sales that would be required to generate the same net income as contained in the budgeted income statement for next year. 3. Determine the dollar sales at which net income would be equal regardless of whether Brothers Company, LLC sells through agents (at a 20% commission rate) or employs its own sales force. 4. Compute the degree of operating leverage the company would expect to have at the end of next year assuming: Use income before income taxes in your operating leverage computation. a. at 15% commission rate b. at 20% commission rate c. employs its own sales force 5. Recommend (and provide support) if Brothers Company, LLC should use sales agents at a 20% commission or employ its own sales force. Part 3: Respond to two classmates. Are the answers to questions 1-4 correct? Do you agree with the recommendation to use agents or employ sales force? Why or why not?