Reference no: EM133087775
Question - Klyne Corporation manufactures pharmaceutical products that are sold through a network of sales agents. The agents are paid a commission of 24% of sales. The income statement for the year ending December 31, 2020, is as follows:
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KLYNE CORPORATION Income Statement For the Year Ending December 31, 2020
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Sales
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$29,000,000
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Cost of goods sold
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Variable
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$14,790,000
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Fixed
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2,876,000
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17,666,000
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Gross margin
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11,334,000
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Selling and marketing expenses
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Commissions
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6,960,000
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Fixed costs
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3,270,000
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10,230,000
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Operating income
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$1,104,000
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Klyne is considering hiring its own sales staff to replace the network of agents. Klyne will pay its salespeople a commission of 12% and incur fixed costs of $2,086,000.
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 $29,000,000, 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 10%, 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?