ADCOR STEEL COMPANY Adcor Steel Company manufactures steel drilling attachments for the oil & gas industry. The company operates multiple steel foundry operations throughout North America. Since the industry is very competitive, Adcor employs a large sales team that is essential to the growth of the organization. The sales agents are currently paid a 17% commission on sales, and this commission rate was used when Hansons management prepared the following budgeted income statement for the upcoming year. Since the completion of the above statement, Adcors management has learned that the independent sales agents are demanding an increase in the commission rate to 20% of sales for the upcoming year. This would be the third increase in commissions demanded by the independent sales agents in five years. As a result, Adcors management has decided to investigate the possibility of hiring its own sales staff to replace the independent sales agents.

Classification: Public Adcors controller estimates that the company will have to hire 7 salespeople to cover the current market area, and the total annual payroll cost of these employees will be about $790,000, including benefits. The salespeople will also be paid commissions of 12% of sales. Travel and entertainment expenses are expected to total about $270,000 for the year. The company will also have to hire a sales manager and support staff whose salaries and benefits will come to $150,000 per year. To make up for the promotions that the independent sales agents had been running on behalf of Adcor, management believes that the companys budget for fixed advertising expenses should be increased by $420,000. Required: 1. Assuming sales of $17,500,000 construct a budgeted contribution format income statement for the upcoming year for each of the following alternatives: a. The independent sales agents' commission rate remains unchanged at 17%. b. The independent sales agents' commission rate increases to 20%. c. The company employs its own sales force. 2. Calculate Adcors break-even point in sales dollars for the upcoming year assuming the following: a. The independent sales agents' commission rate remains unchanged at 17%. b. The independent sales agents' commission rate increases to 20%. c. The company employs its own sales force. 3. Refer to your answer above. If the company employs its own sales force, what volume of sales would be necessary to generate the net operating income the company would realize if sales are $17,500,000 and the company continues to sell through agents (at a 20% commission rate)? 4. Determine the volume of sales at which net operating income would be equal regardless of whether Adcor sells through agents (at 20% commission rate) or employs its own salesforce. 5. Prepare a graph on which you plot the profits for both of the following alternatives: a. The independent sales agents commission rate increases to 20% b. The company employs its own sales force

ADCOR STEEL COMPANY Budgeted Income Statement $ 17,500,000 Sales Cost of Goods Sold: Variable Fixed 9,520,000 1,375,000 10,895,000 6,605,000 Gross Margin Selling & admin expenses: Comissions Fixed advertising expense Fixed administrative expense 2,975,000 420,000 1,070,000 4,465,000 Net operating income $ 2,140,000