Discovery Steel Companymanufactures steel drilling attachments for the oil & gas industry. The company operates multiple steel foundry operations throughout North America. Since the industry is very competitive, Discovery 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, Discoverysmanagement has learned that the independent sales agents are demanding an increase in the commission rate to 21% 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, Discoverys management has decided to investigate the possibility of hiring its own sales staff to replace the independent sales agents. Discoverys 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 Discovery, management believes that the companys budget for fixed advertising expenses should be increased by $420,000.

6. Write a memo to the president of Discovery Steel Company in which you make a recommendation as to whether the company should continue to use independent sales agents (at 21% commission rate) or employ its own sales force. Fully explain the reasons for your recommendation considering both quantitative and qualitative information in the memo.