Beta company sells blouses in Washington, USA. Blouses are imported from Pakistan and are sold to customers in Washington at a profit. Salespersons are paid basic salary plus a decent commission on sales made by them. Sales and expense data is given below:

Selling price per blouse $80.00
———
Variable expenses per blouse:
Invoice cost $36.00
Sales commission $14.00
———
Total $50.00
———
Annual fixed expenses:
Rent $160,000
Marketing  $300,000
Salaries  $140,000
———
Total $600,000
———

Required:

  1. Compute the number of units to be sold to break-even.
  2. Prepare a CVP graph (break-even chart) and show the break-even point on the graph.
  3. If the manage is paid a commission of $6 blouse (in addition to the salesperson’s commission), what will be the effect on company’s break-even point?
  4. As an alternative to (3) above, company is thinking to pay $6 commission to manager on each blouse sold in excess of break-even point. What will be the effect of these changes on the net operating income or loss of the Beta company if 23,500 blouses are sold in a year?
  5. Refer to the original data. What will be the break-even point of the company if commission is entirely eliminated and salaries are increased by $214,000? Should the company make this change?

Solution:

(1) Calculation of break-even point:

Fixed expenses / Contribution margin per unit

$600,000 / $30

20,000 units

or

20,000 units × $80 = $1,600,000

(2) CVP graph or break-even chart:

cvp-graph-breakeven-chart

(3) Break-even point if manager is also paid a commission of $6 per blouse sold:

The payment of a commission of $6 to manager will decrease the unit contribution margin and increase the number of units required to sell to break-even.

$600,000 / $24

25,000 Units

Now the company requires 25000 units or $2,000,000 in sales just to break-even.

(4) Effect on net operating income or loss if manager is paid a commission of $6 on each blouse sold after break-even point:

Sales (23,500 × $80) $ 1,880,000
Less variable expenses (23,500 × $50) 1,175,000
————
705,000
Less manager’s commission [(23,500 – 20,000) × 6] 21,000
————
684,000
 Fixed expenses 600,000
————
Net operating income 84,000
————

(5) Break-even point after elimination of commission and increase in salaries:

$814,000 /$44

18,500 units

or

18,500 × $80 = $14,80,000

Fixed cost after change: $600,000 + 214,000 = 814,000
Unit contribution margin after change: $80 – $36 = $44

With the new system, Beta company will start making profits after selling 18,500 units but with the old system company needs to sell 20,000 units before making any profit. The change should, therefore, be implemented.

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