Related questions
Concept explainers
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?
Trending nowThis is a popular solution!
Step by stepSolved in 4 steps with 9 images
- Described below are certain transactions of Pharoah Company for 2021: On May 10, the company purchased goods from Fox Company for $74,900, terms 2/10, n/30. Purchases and accounts payable are recorded at net amounts. The invoice was paid on May 18. 1. On June 1, the company purchased equipment for $96,000 from Rao Company, paying $31,200 in cash and giving a one- year, 9% note for the balance. 2. On September 30, the company discounted at 11% its $220,000, one-year zero-interest-bearing note at Virginia State Bank, receiving $198,000. 3.arrow_forwardLibscomb Technologies' annual sales are $5,024,963 and all sales are made on credit, it purchases $3,844,500 of materials each year (and this is its cost of goods sold). Libscomb also has $547,231 of inventory, $532,629 of accounts receivable, and beginning and ending of year $421,009 and $481,435 accounts payables (respectively). Assume a 365 day year. What is Libscomb’s Cash Cycle (in days)?arrow_forwardA business sells $100,000 of products to a customer on account and collects 6% sales tax. Cost of the merchandise sold was $70,000. At the end of the month, the company pays the total sales tax collected ($185,000) to the state department of revenue. Required: Record the entries for (a) 'the sale' and for (b) 'the payment of the sales tax.' Indicate Dr. or Cr. in front of each account.arrow_forward
- Subject: accountingarrow_forwardDescribed below are certain transactions of Pharoah Company for 2021: On May 10, the company purchased goods from Fox Company for $74,900, terms 2/10, n/30. Purchases and accounts payable are recorded at net amounts. The invoice was paid on May 18. 1. On June 1, the company purchased equipment for $96,000 from Rao Company, paying $31,200 in cash and giving a one- year, 9% note for the balance. 2. On September 30, the company discounted at 11% its $220,000, one-year zero-interest-bearing note at Virginia State Bank, receiving $198,000. 3.arrow_forwardThe following transactions apply to Ozark Sales for Year 1: The business was started when the company received $48,000 from the issue of common stock. Purchased merchandise inventory of $176,000 on account. Sold merchandise for $202,000 cash (not including sales tax). Sales tax of 7 percent is collected when the merchandise is sold. The merchandise had a cost of $127,000. Provided a six-month warranty on the merchandise sold. Based on industry estimates, the warranty claims would amount to 4 percent of sales. Paid the sales tax to the state agency on $152,000 of the sales. On September 1, Year 1, borrowed $21,500 from the local bank. The note had a 5 percent interest rate and matured on March 1, Year 2. Paid $6,000 for warranty repairs during the year. Paid operating expenses of $55,500 for the year. Paid $124,300 of accounts payable. Recorded accrued interest on the note issued in transaction number 6. b1. Prepare the journal entries for the preceding transactions.b2. Post…arrow_forward
- Required information [The following information applies to the questions displayed below.] The following transactions apply to Ozark Sales for Year 1: 1. The business was started when the company received $50,000 from the issue of common stock. 2. Purchased merchandise inventory of $175,000 on account. 3. Sold merchandise for $206,500 cash (not including sales tax). Sales tax of 7 percent is collected when the merchandise is sold. The merchandise had a cost of $131,500. 4. Provided a six-month warranty on the merchandise sold. Based on industry estimates, the warranty claims would amount to 3 percent of sales. 5. Paid the sales tax to the state agency on $156,500 of the sales. 6. On September 1, Year 1, borrowed $20,000 from the local bank. The note had a 5 percent interest rate and matured on March 1, Year 2. 7. Paid $6,000 for warranty repairs during the year. 8. Paid operating expenses of $55,000 for the year. 9. Paid $124,000 of accounts payable. 10. Recorded accrued interest on…arrow_forwardNu Company reported the following pretax data for its first year of operations. Net sales 2,960 Cost of goods available for sale 2, 480 Operating expenses 830 Effective tax rate 20% Ending inventories: If LIFO is elected 940 If FIFO is elected 1, 150 What is Nu's net income if it elects LIFO? Multiple Choice $800 $ 640 $472 $590arrow_forwardThe following information relates to ELEPHANT INC. for the year ended 2020: Cash purchases - gross P300,000 Trade accounts payable - beginning 500,000 Trade accounts payable - ending 400,000 Trade notes payable decreased by 200,000 Cash payments on payables 1,000,000 Purchase return and discounts (inclusive of P15,000 receipts from suppliers) 20,000 Inventory increased by 100,000 Compute the cost of goods sold under accrual basis of accounting. A. P885,000 B. P950,000 C. P925,000 D. P845,000arrow_forward
- Sales sales revenue for a sporting good store amounted to $539,000 for the correct. All sales are on account and are subject to a sales tax of 11% which of the following would be included in the journal entry to record sales transactionarrow_forwardHeller Company offers an unconditional return policy to its customers. During the current period, the company records total sales of $935,000, with a cost of merchandise to Heller of $374,000. Based on past experience, Heller Company expects 4% of sales to be returned. How much in net sales will Heller Company recognize for the current period?arrow_forwardGAS" Company does not segregate sales and sales taxes at the time of sale. The sales register total for the month of March was $25000. Assume that all sales are subject to a 13% sales tax. Required: Based on the above-given information, answer the following questions: • What amount must be presented as a sales tax expense on the Income statement for the month of March? • What is the amount that must be presented as sales revenue on the income statement for the month of March? If the "GAS" Company did not pay the income tax payable as of 31/3, then the company must present sales tax payable with a value of:arrow_forward
AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,
Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSON
Intermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill Education
Financial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education