Whalley & Co manufacture medical wraps, which are sold through a leading medical
supply company, MedCo. Whalley & Co pays MedCo a 22% commission on sales.
You have been provided with Whalley & Co's statement of income for the year ending
December 31, 2021:
Whalley & Co Statement of Income for the Year Ending December 31, 2021
MedCo Sales Agents
42,000,000
In-house sales agents
with Whalley & Co
42,000,000
Sales
Cost of Goods Sold
Variable
21,300,000
21,300,000
Fixed
3,262,000
Gross Margin
(24,562,000)
17,438,000
3,262,000
(24,562,000)
17,438,000
Marketing Costs
Commissions
9240000
4200000
Fixed Costs
4320000
(13,560,000)
9360000
(13,560,000)
Operating Income
3,878,000
3,878,000
Whalley & Co are considering bringing the sales function in-house and using their own
sales agents. Under this arrangement, Whalley & Co would pay its agents 10%
commissions on sales and incur additional fixed costs of $5,040,000.
Questions:
1. Re-cast the 2021 statement of income, assuming that Whalley & Co have decided to
hire its own sales agents (10 points)
Using the re-cast statement, calculate:
a. contribution margin percentage for each scenario (2 points)
b. breakeven revenues for each scenario (2 points)
c. degree of operating leverage under each of the two scenarios (2 points)
2. In 2022, Whalley & Co decide to use its own in-house sales team. They are not
satisfied with the 10% commission and have requested a 20% commission. If all
other cost-behaviour patterns remain the same (i.e. no change), how much revenue
must the in-house salespeople generate in order to earn the same operating income
as 2021? (4 points)
