Reference no: EM132970721
Quest Corporation distributes cleaning products to commercial and office cleaning companies. It does not manufacture its products but procures them in large quantities from manufacturers. Currently, Quest uses independent sales agents to market the company's products. These agents currently receive a commission of 20% of sales but have communicated their demand for an increase to 25% of sales.
The company had already prepared its budget for next year before learning of the sales agents' expectation of increased commissions. That budgeted income statement appears below:
Quest Corporation
Budgeted Income Statement
Sales $11,000,000
Cost of sales 6,600,000
Gross margin 4,400,000
Selling and administrative expenses:
Commissions $2,000,000
All other expenses (fixed) 150,000
2,150,000
Net income $2,250,000
Quest is now considering the possibility of employing its own salespersons. Three individuals would be required, at a salary of $35,000 each, plus commissions of 4% of sales. In addition, a sales manager would be employed at a fixed annual salary of $165,000.
Required:
Problem a. Compute the company's break-even point in sales dollars. Complete the calculation based on the company's budgeted income statement, presuming that the company continues to use independent sales agents and that they are still paid the existing commission rate of 20% of sales.
Problem b. Compute the company's break-even point in sales dollars, presuming that the company employs its own salespersons.
Problem c. Compute the dollar sales required to attain the target profit of $2,000,000, presuming that the company continues to use independent sales agents and the company agrees to their demand for a 25% sales commission.
Problem d. Compute the sales dollars that would be required to generate the same net income regardless of whether the company employs its own salespersons or continues to use the independent sales agents and pays them a 25% commission.