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Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents, the agents are paid a commission of 18% of sales. The income statement for the year ending December 31, 2014, is as follows.

Bonita Beauty Corporation

Income Statement

For the Year Ended December 31, 2014

Sale 75,000,000

Cost of Goods Sold

Variable 31,500,000

Fixed 8,610,000 40,110,000

Gros Margin 34,890,000

Selling and Marketing Expenses

Commission 13,500,000

Fixed Costs 10,260,000 23,760,000

Operating Income 11,130,000

The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 8% and incur additional fixed cost of $7.5 million.

Required:

a.Under the current policy of using a network of sales agents, calculate the Bonita Beauty Corporation's break-even point in sales dollars for the year 2014.

b.Calculate the company's break-even point in sales dollars for the year 2014 if it hires its own sales force to replace the network of agents.

c.Calculate the degree of operating leverage at sales of $75 million if (1) Bonita Beauty uses sales agents, and (2) Bonita Beauty employs its own sales staff. Describe the advantage and disadvantages of each alternatives.

d.Calculate the estimated sales volume in sales dollars that would generate an identical net income for the year ending December 31, 2014, regardless of whether Bonita Beauty Corporation employs its own sales staff and pays them an 8% commission or continues to use the independent network of agents.

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