Reference no: EM133065774

Question - Klyne Corporation manufactures pharmaceutical products that are sold through a network of sales agents. The agents are paid a commission of 10% of sales. The income statement for the year ending December 31, 2020, is as follows:

KLYNE CORPORATION Income Statement For the Year Ending December 31, 2020
Sales		$35,500,000
Cost of goods sold
Variable	$22,720,000
Fixed	2,636,000	25,356,000
Gross margin		10,144,000
Selling and marketing expenses
Commissions	3,550,000
Fixed costs	1,845,000	5,395,000
Operating income		$4,749,000

Klyne is considering hiring its own sales staff to replace the network of agents. Klyne will pay its salespeople a commission of 15% and incur fixed costs of $2,099,000.

Required -

1. Calculate Klyne Corporation's break-even point in sales dollars for the year 2020.

2. Calculate Klyne Corporation's break-even point in sales dollars for the year 2020 if the company had hired its own sales force to replace the network of agents.

3. Calculate the degree of operating leverage at sales of $35,500,000, considering (a) Klyne uses sales agents and (b) Klyne employs its own staff. Describe the advantages and disadvantages of each alternative.

4. If Klyne increases the commission paid to its sales staff to 20%, keeping all other costs the same, how much revenue (in dollars) would Klyne have to generate to earn the same operating income it did in 2020?