Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 18% of sales. The income statement for the year ending December 31, 2020, is as follows.

The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 8% and incur additional fixed costs of $7.5 million.

Instructions

a. Under the current policy of using a network of sales agents, calculate the Bonita Beauty 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 degree of operating leverage at sales of $75 million if (1) Bonita Beauty uses sales agents, and (2) Bonita Beauty employs its own sales staff. Describe the advantages and disadvantages of each alternative.

d. Calculate the estimated sales volume in sales dollars that would generate an identical net income for the year ending December 31, 2020, regardless of whether Bonita Beauty Corporation employs its own sales staff and pays them an 8% commission or continues to use the independent network of agents.

Transcribed Image Text:

Bonita Beauty Corporation Income Statement For the Year Ended December 31, 2020 Sales $75,000,000 Cost of goods sold Variable $31,500,000 Fixed 8,610,000 40,110,000 Gross margin 34,890,000 Selling and marketing expenses Commissions 13,500,000 Fixed costs 10,260,000 23,760,000 Operating income $11,130,000