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Z Ltd. manufactures a range of products which it sells through manufacture's agents to whom it pays commission of 20% of the selling price of the products. Its budgeted profits and loss statement for 1987 is as follows: 22,50,000 Sales Production costs: Prime costs and variable overhead Fixed Overhead 7,87,500 3,62,500 11,50,000 11,00,000 Selling costs: Commission to manufacturer's agents Sales office expenses (fixed) 4,50,000 20,000 Administration costs (fixed) Profit 4,70,000 6,30,000 3,00.000 3,30,000 Subsequent to the preparation of the above budgeted profit and loss statemer demand from its agents for an increase in their commission to 22% of selling pria considering whether it might achieve more favorable results if it were to discon agent and instead employ its own sales force. The costs that this could involve Sales manager (salary and expenses) .75,000 Salesmen's expenses (including traveling costs) 20.000 Sales office costs (additional to present costs) 50,000 interest and depreciation on sales department cars 35,000 In addition to the above, it will be necessary to hire four salesmen at a salary commission of 5% on sales plus car allowance of Re.1 per kilometer to over depreciation. On the assumption that the company decided to employ its own sales force required to ascertain: of the above budgeted profit and loss statement, the company is faced with a increase in their commission to 22% of selling price. As a result, the company is hieve more favorable results if it were to discontinue the use of manufacturer's wn sales force. The costs that this could involve are budgeted as follows: 75,000 mses) raveling costs) resent costs) 20,000 50,000 s department cars 35,000 e necessary to hire four salesmen at a salary of 40,000 per annum each plus car allowance of Re.1 per kilometer to over all costs except interested and (a) What is the maximum average kilometer per annum that salesmen could travel if the company the same budgeted profit as it would have obtained by retaining the manufacturer's agents them the increased commission they had requested. Assume that sales in each case would be requested. Assume that sales in each case would be as budgeted. ut what level of sales would the original budgeted profit be achieved if each salesmen were to travel on verage of 14,000 kilometers per annum. Assume that all other assumptions inherent in the budgets were maintained. maintained (c) What is the maximum level of commission on sales that the company could afford to pay if it wished to achieve a 16% increase in its original budgeted profit and expected a 16% increase in sales (at budgeted selling prices) and average of 16,000 kilometers per annum to be traveled by each salesmen. Solution