Accounting
CVP Project Data
For the Year Ended 12/31/16
Trump Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a commission of 15% of selling price for all items sold.
Dr. Ben Carson, Trump's controller just prepared the company's budgeted income statement for next year as following:
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TRUMP COMPANY
BUDGETED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016
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SALES
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$16,000,000
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MANUFACTURING COSTS:
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VARIABLE
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$7,200,000
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FIXED
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2,340,000
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9,540,000
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GROSS MARGIN
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6,460,000
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SELLING & ADMIN COSTS:
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COMMISSION TO AGENTS
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2,400,000
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FIXED MARKETING COSTS
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120,000*
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FIXED ADMIN COSTS
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1,800,000
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4,320,000
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NET OPERATING INCOME
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2,140,000
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*primarily depreciation on storage facilities.
As Dr. Carson handed the statement to Donald Trump, Trump's president, he commented "I used the agents' 15% commission rate in completing the Budgeted Income Statement. But we've just learned that they refuse to handle selling our product next year unless we increase the commission rate to 20%."
Donald replied "How can they possibly defend a 20% commission rate? I say it's time we fire those guys and get our own sales force."
Dr. Carson said "We can hire our own sales staff and pay them 10% commission, along with a small salary. Of course, we would have to handle all promotion costs too. We figure our fixed costs would increase by $1,700,000 per year as follows:"
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Sales manager
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$ 200,000
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Salespersons
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400,000
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Travel and Entertainment
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400,000
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Advertising
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700,000
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Total
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$1,700,000
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Required:
Using Excel worksheet, compute Trump's break-even point in sales dollars for next year assuming:
1. The agents' commission rate remains unchanged at 15%
2. The agents' commission rate is increased to 20%
3. The company employs its own sales force.