Syracuse Telecom, Inc. manufactures telecommunications equipment. The company has always been production oriented and sells its products through agents. Agents are paid a commission of 15 percent of the selling price. Syracuse Telecom’s budgeted income statement for 20x2 follows:
SYRACUSE TELECOM,INC. Budgated Incoms Statement For the YearEnded December 31,20x2 (in thousands) | ||
sales |
| $ 16,000 |
Manufacturing costs: | ||
Variable | $7,200 |
|
Fixed overhead | 2,340 | 9.540 |
Gross margin |
| $ 6,460 |
Selling and administrative expenses: | ||
Commissions | $ 2,400 |
|
Fixed marketing expenses | 140 |
|
Fixed administrative expenses | 1,780 | 4,320 |
Net operating income |
| $ 2,140 |
Less fixed interest expense |
| 540 |
Income before income taxes |
| $ 1,600 |
Less income taxes(30%) |
| 480 |
Net income |
| $ 1,120 |
After the profit plan was completed for the coming year , Syracuse Telecom’s sales agents demanded that the commissions be increased to 221/2 percent of the selling price. This demand was the latest in a series of actions that Vinnie McGraw, the company’s president , believed had gone too far. He asked Maureen Elliott. the most sales-oriented officer in his production-oriented company , to estimate the cost to Syracuse Telecom of employing its own sales force. Elliott’s estimate of the additional annual cost of employing its own sales force , exclusive of commissions . follows. Sales personnel would receive a commission of 10percent of the selling price in addition to their salary.
Estimated Annual Cost of Employing a Company Sales Force (in thousands) | |
Salaries: | |
Sales manager | $ 100 |
Sales personnel | 1,000 |
Travel and entertainment | 400 |
Fixed marketing costs | 900 |
Total | $ 2,400 |
Required:
1. Calculate Syracuse Telecom’s estimated break-even point in sales dollars for 20.x 2.
a.If the events that are represented in the budgeted income statement take place.
b.If the company employs its own sales force.
2. If Syracuse Telecom continues to sell through agents and pays the increased commission of 221/2 percent of the selling price , determine the estimated volume in sales dollars for 20x2 that would be required to generate the same net income as projected in the budgeted income statement.
3. Determine the estimated volume in sales dollars that would result in equal net income for 20x2 regardless of whether the company continues to sell through agents and pays a commission of 22 1/2 percent of the selling price or employs its own sales force.
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