Zahner Corporation manufactures housewares products that are sold through a network of external sales agents. The agents are paid a commission of 20% of revenues. Zahner is considering replacing the sales agents with its own salespeople, who would be paid a commission of 10% of revenues and total salaries of $3,520,000. The income statement for the year ending December 31, 2017, under the two scenarios is shown here. Home Insert Page Layout Formulas Data Review View Zahner Corporation Income Statement For the Year Ended December, 2017 Using Sales Agents $35,200,000 3 Using Own Sales Force $35,200,000 5 Revenues 6 Cost of goods sold Variable $13,375,000 4,125,000 17,500,000 17,700,000 $13,375,000 4,125,000 17,500,000 Fixed 9 Gross margin 10 Marketing costs Commissions 17,700,000 $ 7,040,000 4,025.000 11,065,000 S 6,635.000 $ 3,520,000 7,545,000 11 11,065,000 S 6,635,000 Fixed costs 12 13 Operating income
Required
1. Calculate Zahner’s 2017 contribution margin percentage, breakeven revenue, and degree of operating leverage under the two scenarios.
2. Describe the advantages and disadvantages of each type of sales alternative.
3. In 2018, Zahner uses its own salespeople, who demand a 15% commission. If all other cost-behavior patterns are unchanged, how much revenue must the salespeople generate in order to earn the same operating income as in 2017?