Subject: Sales Commissions in a Wholesale Firm; Income Taxes
CASE – Lake Champlain 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% of sales, but they are demanding an increase to 25% of sales made during the year ending December 31, 20X4 budget before learning of the agent’s demand for an increase in commissions.
The budgeted 20x4 income statement is shown below. Assume that cost of goods sold is 100% variable cost.
LAKE CHAMPLAIN SPORTING COMPANY
Budgeted Income Statement
For the Year Ended December 31, 20x4
Sales $15,000,000
Cost of good sold 9,000,000
Gross margin $6,000,000
Selling and Administrative Expenses:
Commissions $3,000,000
All other expenses (fixed) 150,000 3,150,000
Income before taxes $2,850,000
Income Tax (30%) 855,000
Net Income $1,955,000
The company’s management is considering the possibility of employing full-time sales personnel. Three individuals would be required, at an estimated salary of $45,000 each, plus commissions of 5% of sales. In addition, two sales managers would be employed at fixed annual salaries of $120,000 each. All other fixed costs, as well as the variable cost percentages, would remain the same as the estimates in the 20x4 budgeted income statement.
REQUIRED:
Q1. Compute Lake Champlain Sporting Goods’ estimated break-even point in sales dollars for the year ending December 31, 20x4, based on the budgeted income statement prepared by the controller.
Q2. Compute the estimated break-even point in sales dollars for the year ending December 31, 20x4, if the company employs its own sales personnel.
Q3. Compute the estimated volume in sales dollars that would be required for the year ending December 31, 20x4, 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% sales commission.
Q4. Compute the estimated volume in dollars that would generate an identical net income for the year ending December 31, 20x4, regardless of whether Lake Champlain Sporting Goods Company employs its own personnel or continues to use the independent sales agents and pays them a 25% commissions.