Corporation manufactures housewares products that are sold through a network of external sales agents. The agents are paid a commission of 20% of revenues. Zahner is considering replacing the sales agents with its own salespeople, who would be paid a commission of 10% of revenues and total salaries of $3,520,000. The income statement for the year ending December 31, 2017, under the two scenarios is shown here. ? ? ? ? ? ? ? ? ? ?? ?? ?? ?? ? ? ? ? ? Revenues $35,200,000 $35,200,000 Cost of goods sold Variable $13,375,000 $13,375,000 Fixed 4,125,000 17,500,000 4,125,000 17,500,000 Gross margin 17,700,000 17,700,000 Marketing costs Commissions $ 7,040,000 $ 3,520,000 Fixed costs 4,025,000 11,065,000 7,545,000 11,065,000 Operating income $ 6,635,000 $ 6,635,000 Zahner Corporation Using Sales Agents Using Own Sales Force For the Year Ended December, 2017 Income Statement 1. Calculate Zahner’s 2017 contribution margin percentage, breakeven revenue, and degree of operating leverage under the two scenarios. 2. Describe the advantages and disadvantages of each type of sales alternative. 3. In 2018, Zahner uses its own salespeople, who demand a 15% commission. If all other cost-behavior patterns are unchanged, how much revenue must the salespeople generate in order to earn the same operating income as in 2017?
Choosing between compensation plans, operating leverage. (CMA, adapted) Zahner
Corporation manufactures housewares products that are sold through a network of external sales
agents. The agents are paid a commission of 20% of revenues. Zahner is considering replacing the
sales agents with its own salespeople, who would be paid a commission of 10% of revenues and total
salaries of $3,520,000. The income statement for the year ending December 31, 2017, under the two
scenarios is shown here.
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Revenues $35,200,000 $35,200,000
Cost of goods sold
Variable $13,375,000 $13,375,000
Fixed 4,125,000 17,500,000 4,125,000 17,500,000
Gross margin 17,700,000 17,700,000
Marketing costs
Commissions $ 7,040,000 $ 3,520,000
Fixed costs 4,025,000 11,065,000 7,545,000 11,065,000
Operating income $ 6,635,000 $ 6,635,000
Zahner Corporation
Using Sales Agents Using Own Sales Force
For the Year Ended December, 2017
Income Statement
1. Calculate Zahner’s 2017 contribution margin percentage, breakeven revenue, and degree of operating
leverage under the two scenarios.
2. Describe the advantages and disadvantages of each type of sales alternative.
3. In 2018, Zahner uses its own salespeople, who demand a 15% commission. If all other cost-behavior
patterns are unchanged, how much revenue must the salespeople generate in order to earn the same
operating income as in 2017?
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