Assignment Question:
Illawarra Falls Sporting Goods Company, a wholesale supply company, engages independent sales agents to market the company's products throughout Sydney and Wollongong. 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, 2012. The management accountant already prepared the 2012 budget before learning of the agents' demand for an increase in commissions. The budgeted 2012 income statement is shown below. Assume that cost of goods sold is 100 percent variable cost.
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ILLAWARRA FALLS SPORTING GOODS COMPANY Budgeted Income Statement For the Year Ended December 31, 2012
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Sales
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$10,000,000
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Cost of goods sold
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$6,000,000
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Gross margin
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$4,000,000
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Selling and administrative expenses
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Commissions
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$2,000,000
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All other expenses (fixed)
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$100,000
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$2,100,000
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Income
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$1,900,000
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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 2012 budgeted income statement.
Required:
1. Compute Illawarra Falls Sporting Goods' estimated break-even point in sales dollars for the year ending December 31, 2012, based on the budgeted income statement prepared by the management accountant.
2. Compute the estimated break-even point in sales dollars for the year ending December 31, 2012, 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, 2012, to yield the same 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, 2012, regardless of whether Illawarra Falls Sporting Goods Company employs its own sales personnel or continues to use the independent sales agents and pays them a 25 percent commission.
Show workings for all your answers from 1 to 4 above.