Accounting

CASE 4-33
ACCOUNTING

| 15% Commission | 20% Commission | Own Sales Force @ 7.5% | Sales | $ 16,000,000 | 100% | $ 16,000,000 | 100% | $ 16,000,000 | 100% | Variable Expenses: | | | | | | | Manufacturing | $ 7,200,000 | | $ 7,200,000 | | $ 7,200,000 | | Commissions | $ 2,400,000 | | $ 3,200,000 | | $ 1,200,000 | | Total Variable Expenses | $ 9,600,000 | 60% | $ 10,400,000 | 65% | $ 8,400,000 | 52.5% | Contribution Margin | $ 6,400,000 | 40% | $ 5,600,000 | 35% | $ 7,600,000 | 47.5% | Fixed Expenses: | | | | | | | Manufacturing Overhead | $ 2,340,000 | | $ 2,340,000 | | $ 2,340,000 | | Marketing | $ 120,000 | | $ 120,000 | | $ 2,520,000 | | Administrative | $ 1,800,000 | | $ 1,800,000 | | $ 1,725,000 | | Interest | $ 540,000 | | $ 540,000 | | $ 540,000 | | Total Fixed Expenses | $ 4,800,000 | | $ 4,800,000 | | $ 7,125,000 | | Income before Income Taxes | $ 1,600,000 | | $ 800,000 | | $ 475,000 | | Income Tax (30%) | $ 480,000 | | $ 240,000 | | $ 142,500 | | Net Income | $ 1,120,000 | | $ 560,000 | | $ 332,500 | |

1)

a) Break-even point in dollar sales if commission rate remains unchanged at 15%:

Dollar sales to break even = $0 + Fixed Expenses Contribution Margin (CM) Ratio CM Ratio = Total Contibution Margin = $6,400,000 = 0.40 Total Sales $16,000,000

Dollar sales to break even = $0 + $4,800,000 = $12,000,000 (Answer)
0.40

b) Break-even point in dollar sales if commission rate is increased to 20%:

Dollar sales to break even = $0 + Fixed Expenses CM Ratio CM Ratio = Total Contibution Margin = $5,600,000 = 0.35 Total Sales $16,000,000

Dollar sales