LAKE CHAMPLAIN SPORTING GOODS COMPANY

Requirement 1a: BEP in Pesos if the agents’ commission rate remains unchanged at 20%.

Sales 15,000,000.00
Less: Variable Costs
VCOGS 9,000,000.00
Commission 3,000,000.00 (12,000,000.00)
Contribution Margin 3,000,000.00
Less: Fixed Costs (150,000.00)
Income Before Tax 2,850,000.00
Income Tax (30%) (855,000.00)
Net Income 1,995,000.00

CMR 0.20
Fixed Cost 150,000.00
BEP in Pesos 750,000.00

Requirement 1b: BEP in Pesos if the agents’ commission rate is increased to 25%.

Sales 15,000,000.00
Less: Variable Costs
VCOGS 9,000,000.00
Commission 3,750,000.00 (12,750,000.00)
Contribution Margin 2,250,000.00
Less: Fixed Costs (150,000.00)
Income Before Tax 2,100,000.00
Income Tax (30%) (630,000.00)
Net Income 1,470,000.00

CMR 0.15
Fixed Cost 150,000.00
BEP in Pesos 1,000,000.00

Requirement 1c: BEP in Pesos if the company employs its own sales force

Sales 15,000,000.00
Less: Variable Costs
VCOGS 9,000,000.00
Commission 750,000.00 (9,750,000.00)
Contribution Margin 5,250,000.00
Less: Fixed Costs
Other Fixed Costs 150,000.00
3 Individual's Annual Salaries 135,000.00
Managers' Annual Salaries 240,000.00 (525,000.00)
Income Before Tax 4,725,000.00
Income Tax (30%) (1,417,500.00)
Net Income 3,307,500.00

CMR 0.35
Fixed Cost 525,000.00
BEP in Pesos 1,500,000.00

Requirement 2: Sales volume to generate the same net income at 20% commission

TFxC + DP TFxC + DP
TSP = TSu =
WaCMR WaUCM

WaCMR = Σ (CMRj X SMPj ) WaUCM = Σ (CM/uj X SMuj)

or or
Total CM Total CM
WaCMR = WaUCM =
Total Sales Total Units

Given:
Fixed Cost 150,000.00
Desired Profit 2,850,000.00
CMR 0.20
Targeted Sales 15,000,000.00

Requirement 3: Volume of Sales at which Net Income would be equal

COGS to Sales 0.60

Commission 0.25

25 % Commission RatOwn Sales Force

Sales 1,875,000.00 1,875,000.00
Less: Variable Costs
VCOGS 1,125,000.00 1,125,000.00
Commission 468,750.00 93,750.00
Contribution Margin 281,250.00 656,250.00
Less: Fixed Costs
Other Fixed Costs 150,000.00 150,000.00
Annual Salaries - 3 individuals 135,000.00
Annual Salaries - 2 Managers 240,000.00
Income before Tax 131,250.00 131,250.00

Requirement 4: Margin of safety

A. 20% Commission B. 25% Commission C. Own Sales Force

Sales 15,000,000.00 15,000,000.00 15,000,000.00
BEP in Pesos 750,000.00 1,000,000.00 1,500,000.00
Margin of Safety 14,250,000.00 14,000,000.00 13,500,000.00
Relax Company and Recline Company

Relax Company
at 1,000 units at 850 units Decrease %
Sales 700,000.00 595,000.00 (105,000.00) 15%
Variable Cost 100,000.00 85,000.00 (15,000.00) 15%
Contribution Margin 600,000.00 510,000.00 (90,000.00) 15%
Fixed Costs 400,000.00 400,000.00 - 0%
Profit before Tax 200,000.00 110,000.00 (90,000.00) 45%

DOL = CM/PBT DOL = 700,000/200,000

DOL = 3

% Change in Profit = % Change in Sales x DOL

% Change in Profit = 15% x 3
% Change in Profit = 45%

ANSWER: With the decrease in sales, Recline Company will lose lesser money compared to Relax Company.
The DOL of Recline is lesser than that of Relax and the impact on the % change in profit is lesser.
One reasonn is that the fixed costs of Relax Company is higher than that of Recline.
 Recline Company
at 1,000 units at 850 units Decrease %
700,000.00 595,000.00 (105,000.00) 15%
300,000.00 255,000.00 (45,000.00) 15%
400,000.00 340,000.00 (60,000.00) 15%
200,000.00 200,000.00 - 0%
200,000.00 140,000.00 (60,000.00) 30%

DOL = CM/PBT DOL = 400,000/200,000

DOL = 2

% Change in Profit = % Change in Sales x DOL

% Change in Profit = 15% x 2
% Change in Profit = 30%

money compared to Relax Company.

on the % change in profit is lesser.
r than that of Recline.