Charleston Corporation manufactures syringes that are sold to hospitals through a network of independent sales agents located in the U.S., Mexico, and Canada. These agents sell a variety of products to hospitals in addition to Charleston’s syringes. The sales agents are currently paid a 15% commission on sales. This commission rate was used when Charleston prepared the following budgeted income statement for the upcoming year.

Charleston Corporation

Budgeted Income Statement

Sales $40,000,000

Less Cost of Goods Sold:

Variable $22,400,000

Fixed 5,000,000 27,400,000

Gross Margin $12,600,000

Less Selling and Administrative Expenses:

Commissions $ 6,000,000

Fixed Selling & Admin. Expenses 5,500,000 11,500,000

Net Income $ 1,100,000

Since the completion of this statement, Charleston’s management has learned that the independent sales agents are demanding an increase in the commission rate to 16% 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, Charleston’s management has decided to investigate the possibility of hiring its own sales staff to replace the independent sales agents.

Charleston’s controller estimates that the company would have to hire 28 salespeople to cover the current market area, and the total annual salary cost of these employees would be about $1,136,000. The sales people would also be paid commissions of 10% of sales. Travel and entertainment expenses (fixed) are expected to total about $600,000 for the year. The company would also have to hire a sales manager and support staff whose total salaries would be $180,000 per year. To make up for the advertising that the independent sales agents had been doing on behalf of Charleston, management believes the company’s budget for fixed advertising expenses should increase by $300,000. (All of the fixed costs mentioned in this paragraph are in addition to those already in the budgeted income statement above.)

1. Assuming sales of $40 million, construct a budgeted contribution format income statement for the upcoming year for each of the following alternatives.

1. The company uses the independent sales agents and increases the commission rate to 16%.
2. The company employs its own sales force.

2. Calculate Charleston’s break-even point in sales dollars for the upcoming year assuming:

a. The independent sales agent commission rate increases to 16%.

2. The company employs its own sales force.

3. The company would like to achieve its budgeted net income of $1,100,000. How much more in dollars of sales would be needed if the company uses the outside sales force at 16% compared to using its own sales force to earn this targeted net income (round solutions to nearest whole dollar)?

Write a memo to the president of Charleston in which you make a recommendation as to whether the company should continue to use independent sales agents at a 16% rate or employ it own sales force. Fully explain your reasons, including the advantages and disadvantages of your recommendation.