CVP Corporation manufactures pharmaceutical products sold through a network of sales agents. The agents are currently paid an 12% commission on sales with a yearly bonus of 2% of profit after tax (PAT); that percentage was used when CVP prepared the following budgeted income statement for the calendar year ending September, 2021 CVP Corporation Budgeted Income Statement For the Year ending September 30, 2021 (Rs ’000 omitted) Sales Rs 52,750 Cost of goods sold Variable Rs 16,880 Fixed 13,950 30,830 Gross Profit Rs. 21,920 Selling & Administrative costs Commissions Rs 6,330 Fixed advertising cost 2,950 Fixed administrative cost 2,530 11,810 Operating Income (EBIT) Rs 10,110 Fixed Interest cost 1,225 Income before income taxes (EBT) Rs 8,885 Income Taxes (30%) 2,666 Net Income (PAT) Rs 6,219 Since the completion of income statement, CVP has learned that its sales agents are requiring a 6% increase in their commission rate (to 18%) for the upcoming year. As a result, CVP’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 CVP’s controller, to gather information on the costs associated with this change. The controller estimates that CVP must hire eight salespeople to cover the current market area, at an average annual payroll cost for each employee of Rs 325,000, including fringe benefit expense. Travel & entertainment expense is expected to total Rs 500,000 for the year, and annual cost of hiring a sales manager will be Rs 600,000. In addition to their salaries, the five salespeople will each earn commissions at the rate of 5%. The president believes that CVP also should increase its advertising budget by Rs 250,000. Required: a) Determine CVP Corporation’s breakeven point in sales dollars for the calendar year ending September 30, 2021, if the company hires its own sales force and increase its advertising costs. b) If CVP continues to sell through its network of sales agents and pays the higher commission rate, determine the estimated volume in sales Rs for the calendar year ending September 30, 2021 that would be required to generate the same net income (PAT) as projected in budgeted income statement. c) Describe the general assumptions underlying breakeven analysis that limit its usefulness. d) What is the indifference point in sales for the firm to either accept the agents’ demand or adopt the proposed change? Which plan is better for the firm?
The Effect Of Prepaid Taxes On Assets And Liabilities
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Final Accounts
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Adjustment Entries
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CVP Corporation manufactures pharmaceutical products sold through a network of
sales agents. The agents are currently paid an 12% commission on sales with a yearly bonus
of 2% of profit after tax (PAT); that percentage was used when CVP prepared the following
budgeted income statement for the calendar year ending September, 2021
CVP Corporation
Budgeted Income Statement
For the Year ending September 30, 2021
(Rs ’000 omitted)
Sales Rs 52,750
Cost of goods sold
Variable Rs 16,880
Fixed 13,950 30,830
Gross Profit Rs. 21,920
Selling & Administrative costs
Commissions Rs 6,330
Fixed advertising cost 2,950
Fixed administrative cost 2,530 11,810
Operating Income (EBIT) Rs 10,110
Fixed Interest cost 1,225
Income before income taxes (EBT) Rs 8,885
Income Taxes (30%) 2,666
Net Income (PAT) Rs 6,219
Since the completion of income statement, CVP has learned that its sales agents are
requiring a 6% increase in their commission rate (to 18%) for the upcoming year. As a result,
CVP’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 CVP’s controller, to gather information on the
costs associated with this change.
The controller estimates that CVP must hire eight salespeople to cover the current
market area, at an average annual payroll cost for each employee of Rs 325,000, including
fringe benefit expense. Travel & entertainment expense is expected to total Rs 500,000 for the
year, and annual cost of hiring a sales manager will be Rs 600,000. In addition to their
salaries, the five salespeople will each earn commissions at the rate of 5%. The president
believes that CVP also should increase its advertising budget by Rs 250,000.
Required:
a) Determine CVP Corporation’s breakeven point in sales dollars for the calendar year
ending September 30, 2021, if the company hires its own sales force and increase its
advertising costs.
b) If CVP continues to sell through its network of sales agents and pays the higher
commission rate, determine the estimated volume in sales Rs for the calendar year ending
September 30, 2021 that would be required to generate the same net income (PAT) as
projected in budgeted income statement.
c) Describe the general assumptions underlying breakeven analysis that limit its usefulness.
d) What is the indifference point in sales for the firm to either accept the agents’ demand or
adopt the proposed change? Which plan is better for the firm?
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