Lumon Industries, the industry leader in Macrodata Refinement and distributor of a variety of goods, is considering a change in how the company's products are distributed. Lumon's products are sold through a group of external sales agents who are paid a commission equal to 20% of revenues. Mark Scout, a new manager at Lumon, is considering replacing these external sales agents with an internal sales force. This internal sales force would instead be paid a commission of 15% of revenues, plus total salaries of $1,750,000. The income statement for the prior year is below.

Exhibit 1:
Lumon Industries Income Statement
For the year ended 12/31/2023
Revenues		$35,000,000
Direct materials	8,750,000
Direct labor	10,500,000
Fixed manufacturing costs	4,750,000
COGS		24,000,000
Gross margin		11,000,000
Commissions	7,000,000
Fixed marketing costs	1,450,000
SG&A		8,450,000
Operating income		$2,550,000

Required

1. Calculate the total contribution margin, contribution margin ratio, and break-even revenues under the current scenario (i.e., when sales are outsourced). In addition, calculate what would have been total contribution margin, contribution margin ratio, and break-even revenues supposing that Mark had used internal sales people throughout 2023.
2. Explain to Mark whether the CVP analysis indicates that one of the two systems (using an external vs. an internal sales force) is superior to the other. If neither system is superior, briefly list some factors Mark should consider in choosing a system.
3. Suppose it is now 2024, and Mark chose an internal sales force. However, the salespeople negotiated to receive their full salaries, plus a 18% commission (instead of 15%). Assuming all other cost behavior stays the same as presented in the original question, how much must total sales dollars be so that Lumon Industries earns the same operating income as they did in 2023?
4. Mark says to his boss at Lumon, Milchick, "I get that operating leverage is important, but I struggle to understand what affects it. Like, suppose we add a new customer. Does that change our operating leverage? Or what if we raise prices, assuming no loss of customers?" How should Milchick respond?