Niagra Falls Sporting Goods Company, a wholesale supply company, engages independent sales agents

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

Sales ———-10,000,000

Cost of goods sold —- 6,000,000

Gross profit ———– 4,000,000

Selling & Administrative expenses:

  Commissions  $2,000,000

   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.

 

Required:

 

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.