Question

Power Trading Ltd is a wholesale supply company which engages external sales agents to market the company’s products. These agents currently receive a commission of 20% of sales, but they now demand an increase of commission to 25% of sales. The management had already prepared its budget for next year before the sales agents requested the increase in commissions. The budgeted income statement of the company is shown below:

$ $
Sales revenues 10,000,000
Cost of sales (variable) 6,000,000
Gross profit 4,000,000
Operating expenses:
Sales commissions (variable) 2,000,000
Administrative (fixed) 300,000 2,300,000
Net profit 1,700,000

The management is considering the possibility of employing its own salespersons. They planned to employ three sales executives at a fixed annual salary of $50,000 each, plus commissions of 5% of sales. In addition, a sales manager would be employed at a fixed annual salary of $250,000.

Required:

(a) Based on the company’s budgeted income statement and assuming that the company continues to engage external sales agents who are paid the current commission rate of 20% of sales, calculate the break-even point in sales dollars.

(b) Determine the new break-even point in sales dollars assuming:
(i) the commission paid to external sales agents is increased to 25% of sales, and
(ii) the company employs its own salespersons.

(c) Assuming that the company continues to engage external sales agents and agrees to increase the sales commission to 25% of sales, calculate the required sales dollars to earn a target profit of $1,900,000.