Niagra Falls Sporting Goods Company, a wholesale supply company, engages independent sales agents to market the company s products throughout New York and Ontario. These agents currently receive a commission of 20 percent of sales, but they are demanding an increase to 25 percent of sales made during the year ending December 31, 20×2. The controller already prepared the 20×2 budget before learning of the agents demand for an increase in commissions. The budgeted 20×2 income statement is shown below. Assume that cost of goods sold is 100 percent variable cost.
Niagra Falls Company
Budgeted Income Statement
For the year ended Dec. 31, 20×2
Cost of goods sold —- 6,000,000
Gross profit ———– 4,000,000
Selling & Administrative expenses:
All other expenses (fixed) 100,000 2,100,000
Income before taxes ——– 1,900,000
Income tax ————– 570,000
Net Income ———– $1,330,000
The company s management is considering the possibility of employing full-time sales personnel. Three individuals would be required, at an estimated annual salary of $30,000 each, plus commissions of 5 percent of sales. In addition, a sales manager would be employed at a fixed annual salary of $160,000. All other fixed costs, as well as the variable cost percentages, would remain the same as the estimates in the 20×2 budgeted income statement.
1. Compute Niagra Falls Sporting Goods estimated break-even point in sales dollars for the year ending December 31, 20×2, based on the budgeted income statement prepared by the controller.
2. Compute the estimated break-even point in sales dollars for the year ending December 31, 20×2, if the company employs its own sales personnel.
3. Compute the estimated volume in sales dollars that would be required for the year ending December 31, 20×2, to yield the same net income as projected in the budgeted income statement, if management continues to use the independent sales agents and agrees to their demand for a 25 percent sales commission.
4. Compute the estimated volume in sales dollars that would generate an identical net income for the year ending December 31, 20×2, regardless of whether Niagra Falls Sporting Goods Company employs its own sales personnel or continues to use the independent sales agents and pays them a 25 percent commission.