Lionel Corporation manufactures pharmaceutical products sold through a network of sales agents in the United States and

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Lionel Corporation manufactures pharmaceutical products sold
through a network of sales agents in the United States and Canada.
The agents are currently paid an 18% commission on sales; that
percentage was used when Lionel prepared the following budgeted
income statement for the fiscal year ending June 30, 2022:
Since the completion of the income statement, Lionel has learned
that its sales agents are requiring a 5% increase in their
commission rate (to 23%) for the upcoming year. As a result,
Lionel’s president has decided to investigate the possibility of
hiring its own sales staff in place of the network of sales agents
and has asked Alan Chen, Lionel’s controller, to gather information
on the costs associated with this change.
Alan estimates that Lionel must hire eight salespeople to cover
the current market area, at an average annual payroll cost for each
employee of $80,000, including fringe benefits expense. Travel and
entertainment expenses are expected to total $790,000 for the year,
and the annual cost of hiring a sales manager and sales secretary
will be $245,000. In addition to their salaries, the eight
salespeople will each earn commissions at the rate of 10% of sales.
The president believes that Lionel also should increase its
advertising budget by $690,000 if the eight salespeople are
hired.
Required:
1. Determine Lionel’s breakeven point (operating profit = 0) in
sales dollars for the fiscal year ending June 30, 2022, if the
company hires its own salesforce and increases its advertising
costs. Prove this by constructing a contribution income
statement.
2. If Lionel continues to sell through its network of sales
agents and pays the higher commission rate, determine the estimated
volume in sales dollars that would be required to generate the
operating profit as projected in the budgeted income statement.