Step 1

Read through the attached Chapter 5 Case Study Scenario

Step 2

Case Study Table below and complete it.

Step 3

Post your answers to the following questions. You must number your answers to match the questions. Use the information from your completed table. Upload the contents of the table into your response.

Managerial Accounting Table used in Chapter 5 Case Study. Completion of this table will help you to answer questions 1 5. Enter the dollar amounts for all line items. Enter the percentages for sales, total variable expenses, and contribution margin. Sales Variable expenses: Manufacturing Commissions (15%, 20%, 7.5%) Total variable expenses Contribution margin Fixed expenses: Manufacturing overhead Marketing Administrative Interest Total fixed expenses Income before income taxes Income taxes (30%) Net income 15% Commission 5 100 % % % 20% Commission Own Sales Force 5 100 % % % 5 100.0 % % % Case 5-32 (Static) Cost Structure; Break-Even and Target Profit Analysis [LO5-4, LO5-5, LO5-6] Salaries: Sales manager $ 100,000 Salespersons 600.000 Brothers Company, LLC is a manufacturer of telecommunications equipment. To market its Travel and entertainment 400.000 products, the company uses independent sales agents. The agents are paid a sales commission of Advertising 1,300,000 15% of the selling price of all items sold. Total $2,400,000 Laura Lee, Brothers' controller, has just prepared the company's budgeted income statemen next year as follows: "Great!" replied Nicholas. "And I noticed that the $2,400,000 equals what we're paying the agents under the old 15% commission rate." Brothers Company, LLC Budgeted Income Statement "It's even better than that," explained Laura. "We can save $75,000 a year because that's the fee we For the Year Ended December 31 Sales $ 16,000,000 pay our auditors to verify the agents' reports. So, our overall administrative expenses would be less.' Manufacturing expenses: Variable $ 7,200,000 "Pull all of these numbers together and we'll show them to the executive committee tomorrow," said Fixed overhead 2,340,000 9,540,000 Nicholas. "With the approval of the committee, we can move on the matter immediately." Gross margin 6,460,000 inistrative expenses: 1. Compute Brothers Company's break-even point in dollar sales for next year assuming: Commissions to agents 2,400,000 a. at 15% commission rate Fixed marketing expenses 120,000* b. at 20% commission rate Fixed administrative expenses 1,800.000 4,320,000 c. employs its own sales force Net operating income 2,140,000 Fixed interest expenses 540,000 2. Assume that Brothers Company decides to continue selling through agents and pays the 20% Income before income taxes 1,600,000 commission rate. Determine the dollar sales that would be required to generate the same net income Income taxes (30%) 480,000 as contained in the budgeted income statement for next year. Net income $ 1,120,000 3. Determine the dollar sales at which net income would be equal regardless of whether Brothers Company sells through agents (at a 20% commission rate) or employs its own sales force. *Primarily depreciation on storage facilities 4. Compute the degree of operating leverage that the company would expect to have at the end of As Laura handed the statement to Nicholas Adam, Brothers' president, she commented, "I went next year assuming: ahead and used the agents' 15% commission rate in completing these statements, but I have a. a. at 15% commission rate received an email indicating the current agents refuse to sell our products next year unless we b. at 20% commission rate increase the commission rate to 20%." c. employs its own sales force Use income before income taxes in your operating leverage computation. "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 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% * $16,000,000) that we would avoid on agents' commissions." The breakdown of the $2,400,000 cost follows