Scenario 1

Widgets Corp, a wholesale roofing supply company, uses independent sales agents to market its products. These agents currently receive a commission of 20% of sales but are demanding an increase to 25% of sales. Widgets Corp had already prepared its budget for next year before learning of the sales agents' demand for an increase in commissions. See below for the budgeted income statement:

Widgets Corp.

Budgeted income statement

Sales

$10,000,000

Cost of sales

6,000,000

Gross margin

4,000,000

Selling and administrative expenses:

Commissions

$2,000,000

All other expenses (fixed)

100,000

2,100,000

Operating income

$1,900,000

Widgets Corp is considering the possibility of employing its own salespeople, rather than using independent agents. Three employees would be required, at a salary of $30,000 each plus commissions of 5% of sales. In addition, a sales manager would be employed at a fixed annual salary of $160,000.

The management team would like to know the sales value at which point it becomes irrelevant to the company's profit which option it uses.