Reference no: EM132542036

Point 1: GCQ Company is a small but growing 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 commission of 15% of selling price for all items sold. Inday, GCQ's controller, has just prepared the company's budgeted income statement for next year. The statement follows: GCQ Company Budgeted Income Statement For the year ended December 31 Sales P16,000,000 Less: Manufacturing Costs Variable 7,200,000 Fixed overhead* 2,340,000 9,540,000 Gross Profit P 6,460,000 Less: Operating Expenses Marketing Expenses Commissions to agents 2,400,000 Fixed marketing costs 120,000 2,520,000 Administrative Expenses 1,800,000 Operating Income P 2,140,000 Less: Fixed Interest Cost 540,000 Income before income taxes 1,600,000 Less: Income Tax (30%) 480,000 Net Income P 1,120,000 *primarily depreciation on storage facilities As Inday handed the statement to Rody, GCQ's president, she commented, "I went ahead and used the agents' 15% commission rate in completing these statements, but we've just learned that they refuse to handle our products next year unless we increase the commission rate to 20%."

Point 2: "That's the las straw," Rody replied angrily. "Those agents have been demanding more and more. This time they've gone too far. How can they possibly defend a 20% commission rate?" "They claim that after paying for advertising, travel, and other costs of promotion, there's nothing left over for profit," replied Inday. "I say it's just plain robbery," retorted Rody. "And I also say it's time we dump those guys and get our own sales force. Can you get your people to work up some cost figures for us to look at?" "We've already worked them up," said Inday. "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 costs would increase by P2,400,000 per year, but that would be more than offset by the P3,200,000 (20% x P16,000,000) that we would avoid on agent's commissions." The breakdown of the P2,400,000 cost figure follows: Salaries Sales manager P 100,000 Sales persons 600,000 Travel and entertainment 400,000 Advertising 1,300,000 Total P2,400,000 "Super," replied Rody. "And I note that the P2,400,000 is just what we're paying the agents under the old 15% commission rate." "It's even better than that," explained Inday. "We actually save P75,000 a year because that's what we're having to pay the auditing firm now to check out the agents' reports so our overall administrative costs would be less." "Pull all of these number together and we'll show them to the executive committee tomorrow," said Rody. "With the approval of the committee, we can move on the matter immediately."

Required:

Question 1. What is the breakeven point in pesos for next year assuming that the agent's commission rate remains unchanged at 15%?

Question 2. What is the breakeven point in pesos for next year assuming that the agent's commission rate is increased to 20%?

Question 3. What is the breakeven point in pesos for next year if the company employs its own sales force?

Question 4. Assume that GCQ Company decides to continue selling through agents and pays the 20% commission rate. What would be the volume of sales that would be required to generate the same net income as contained in the budgeted income statement for next year?

Question 5. What is the volume of sales at which net income would be equal regardless of whether GCQ Company sell through agents (at a 20% commission rate) or employs its own sales force? (DCCPAR adapted)