Mediflex Ltd produces sterile gloves for hospitals and medical centres. The company sells

its products through independent sales agents located in different parts of Australia and

New Zealand. The independent sales agents sell many other products in addition to

Mediflex's gloves.

The chief accountant of Mediflex has prepared the following budgeted income statement

for the next financial year.

Mediflex Limited

Budgeted Income Statement

Sales $ 30,000,000

Cost of Goods Sold

Variable $ 17,400,000

Fixed $ 2,800,000 $ 20,200,000

Gross margin $ 9,800,000

Sales and administrative expenses:

Commissions $ 5,400,000

Fixed advertising expense $ 800,000

Fixed administrative expense $ 3,200,000 $ 9,400,000

Net operating income $ 400,000

The above income statement has been prepared with an assumption that the company

will have to pay 18% sales commissions to independent agents. After the above income

statement has been prepared, the management has been notified that sales agents are

demanding to increase the commission rate from 18% to 20% for next year. This is the

fourth time that the sales agents have demanded to rise the commission. In response, the

management of Mediflex is considering the possibility of recruiting its own sales staff to

replace the independent sales agents.

If own sales agents are hired, the company will have to recruit 10 agents. The total annual

salary payment will be $700,000. These new employees will be paid 10% sales

commission. $400,000 will be paid for the new agents' transportation and entertainment

purposes. In addition, a sales manager and support staffs need to be recruited that will

cost the company $200,000 for an annual salary. The fixed advertisement cost will

increase by $500,000.

Requirements:

1. The management estimates that if independent sales agents are used with 20%

commission, the company will generate $30,000,000 in sales revenue next year.

If the company recruits its own sales force, what amount of sales revenue needs

ACC604_Assessment 2 Brief_Problem scenarios and reflection report_Module 5.1Page7of13

to be generated to earn the same amount of operating income that independent

agents would generate?

2. At which volume of sales, the net operating income of Mediflex would be equal

regardless of whether Mediflex sells its products through independent agents with

a 20% commission rate or recruits its own sales agents.