XYZ Company is located in California and manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items sold.

Lisa, XYZs controller, has just prepared the companys budgeted income statement for next year as follows:

XYZ Company Budgeted Income Statement For the Year Ended December 31
Sales				$	16,000,000
Manufacturing expenses:
Variable	$	7,200,000
Fixed overhead		2,340,000			9,540,000
Gross margin					6,460,000
Selling and administrative expenses:
Commissions to agents		2,400,000
Fixed marketing expenses		120,000	*
Fixed administrative expenses		1,800,000			4,320,000
Net operating income					2,140,000
Fixed interest expenses					540,000
Income before income taxes					1,600,000
Income taxes (30%)					480,000
Net income				$	1,120,000

*Primarily depreciation on storage facilities.

As Lisa handed the statement to Jason Smith, XYZs president, she commented, I went ahead and used the agents 15% commission rate in completing these statements, but weve just learned that they refuse to handle our products next year unless we increase the commission rate to 20%.

Thats the last straw, Jason replied angrily. Those agents have been demanding more and more, and this time theyve gone too far. How can they possibly defend a 20% commission rate?

They claim that after paying for advertising, travel, and the other costs of promotion, theres nothing left over for profit, replied Lisa.

I say its just plain robbery, retorted Jason. And I also say its time we dumped those guys and got our own sales force. Can you get your people to work up some cost figures for us to look at?

Weve already worked them up, said Lisa. Several companies we know about pay a 7.5% commission to their own salespeople, along with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fixed expenses would increase by $2,400,000 per year, but that would be more than offset by the $3,200,000 (20% $16,000,000) that we would avoid on agents commissions.

The breakdown of the $2,400,000 cost follows:

Salaries:
Sales manager	$	100,000
Salespersons		600,000
Travel and entertainment		400,000
Advertising		1,300,000
Total	$	2,400,000

Super, replied Jason. And I noticed that the $2,400,000 equals what were paying the agents under the old 15% commission rate.

Its even better than that, explained Lisa. We can actually save $75,000 a year because thats what were paying our auditors to check out the agents reports. So our overall administrative expenses would be less.

Pull all of these numbers together and well show them to the executive committee tomorrow, said Jason. With the approval of the committee, we can move on the matter immediately.

3. Determine the dollar sales at which net income would be equal regardless of whether XYZ Company sells through agents (at a 20% commission rate) or employs its own sales force.