The company that you work for as a managerial accountant uses independent agents to sell its products. These agents are currently being paid a commission of 15% of the sales price but are asking for an increase to 20% of sales made during the coming year. You had already prepared the following income statement for the company based on the 15% commission:
Income Statement
Year Ending April 30, 2012
Sales ............................................................... $ 1,000,000
Cost of goods sold (all variable) .................................... 600,000
Gross profit ............................................................400,000
Selling and administrative expenses
(Variable-commission only) .............. $150,000.....................
Fixed costs ......................................10,000 ..............160,000
Income before taxes ................................................. 240,000
Income tax expense (25%) ........................................... 60,000
Operating income ................................................... $ 180,000
Management wants to examine the possibility of employing the company's own salespeople. The company would need a sales manager at an annual salary of $60,000 and three salespeople at an annual salary of $30,000 each, plus a commission of 5% of sales. All other fixed costs as well as the variable cost percentages would remain the same as in the above pro forma income statement.
Instructions
(a) Based on the pro forma income statement you have already prepared, calculate the break-even point in sales dollars for the company for the year ending April 30, 2012.
(b) Calculate the break-even point in sales dollars for the year ending April 30, 2012, if the company uses its own salespeople?
(c) Calculate the volume of sales dollars required for the year ending April 30, 2012, to have the same operating income as projected in the pro forma income statement if the company continues to use the independent sales agents and agrees to their demand for a 20% sales commission.
(d) Calculate the estimated sales volume in sales dollars that would generate an identical operating income for the year ending April 30, 2012, regardless of whether the company employs its own salespeople or continues to use the independent sales agents and pays them a 20% commission?