Reference no: EM132650073

NanoTech Corporation manufactures computer chips that are used in biotechnology products. The company operates multiple manufacturing facilities throughout North America. Since the industry is very competitive, NanoTech employs a large sales team that is essential to the growth of the organization.

The sales agents are currently paid a 17% commission on sales, and this commission rate was used when management prepared the following budgeted income statement for the upcoming year.

Since the completion of the above statement, management has learned that the independent sales agents are demanding an increase in the commission rate to 19% of sales for the upcoming year. This would be the third increase in commissions demanded by the independent sales agents in five years. As a result, management has decided to investigate the possibility of hiring its own sales staff to replace the independent sales agents.

NanoTech's controller estimates that the company will have to hire 7 salespeople to cover the current market area, and the total annual payroll cost of these employees will be about $790,000, including benefits. The salespeople will also be paid commissions of 12% of sales. Travel and entertainment expenses are expected to total about $270,000 for the year. The company will also have to hire a sales manager and support staff whose salaries and benefits will come to $150,000 per year. To make up for the promotions that the independent sales agents had been running on behalf of NanoTech, management believes that the company's budget for fixed advertising expenses should be increased by $420,000.

Required:

Question 1. Assuming sales of $17,500,000 construct a budgeted contribution format income statement for the upcoming year for each of the following alternatives:

a. The independent sales agents' commission rate remains unchanged at 17%.

b. The independent sales agents' commission rate increases to 19%.

c. The company employs its own sales force.

Question 2. Calculate NanoTech's break-even point in sales dollars for the upcoming year assuming the following:

a. The independent sales agents' commission rate remains unchanged at 18%.

b. The independent sales agents' commission rate increases to 19%.

c. The company employs its own sales force.

Question 3. Refer to your answer above. If the company employs its own sales force, what volume of sales would be necessary to generate the net operating income the company would realize if sales are $17,500,000 and the company continues to sell through agents (at a 19% commission rate)?

Question 4. Determine the volume of sales at which net operating income would be equal regardless of whether NanoTech sells through agents (at 19% commission rate) or employs its own salesforce.

Question 5. Make a graph on which you plot the profits for both of the following alternatives:

a. The independent sales agents' commission rate increases to 19%

b. The company employs its own sales force

Question 6. Also, make a memo to the president of NanoTech Corporation in which you make a recommendation as to whether the company should continue to use independent sales agents (at 19% commission rate) or employ its own sales force. Fully explain the reasons for your recommendation considering both quantitative and qualitative information in the memo.