Niagra Falls Sporting Goods Company, a wholesale supply company, engages indepen

Question

Niagra Falls 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 15 percent of sales, but they are demanding an increase to 20 percent of sales made during the year ending December 31, 20x2. The controller already prepared the 20x2 budget before learning of the agents' demand for an increase in commissions. The budgeted 20x2 income statement is shown below. Assume that cost of goods sold is 100 percent variable cost. NIAGRA FALLS SPORTING GOODS COMPANY Budgeted Income Statement For the Year Ended December 31, 20x2 Sales Cost of goods sold Gross margin Selling and administrative expenses: $12,000,000 7,200,000 $ 4,800,000 $1,800,000 85,000 Commissions All other expenses (fixed) Income before taxes Income tax (35%) Net income 1,885,000 2,915,000 1,020,250 $ 1,894,750 The company's sales manager, Joey Dulwich, is considering the possibility of employing full-time sales personnel. Three individuals would be required, at an estimated annual salary of $25,000 each, plus commissions of 7 percent of sales. In addition, a sales manager would be employed at a fixed annual salary of $70,000. All other fixed costs, as well as the variable cost percentages, would remain the same as the estimates in the 20x2 budgeted income statement.

Explanation / Answer

1 Break-even point in sales $=Fixed cost/Contribution margin ratio Fixed cost=$85000 Contribution margin ratio=(Contribution/sales) Contribution=Gross margin-Commissions=4800000-1800000=3000000 Contribution margin ratio=(3000000/12000000)=0.25 Break-even point in sales $=85000/0.25=$340000 2 Break-even point in sales $=Fixed cost/Contribution margin ratio Fixed cost: Sales personnel-salary (25000*3) 75000 Sales manager-salary 70000 Other expenses 85000 230000 Contribution margin ratio=(Contribution/sales) Contribution=Gross margin-Commissions=4800000-(12000000*7%)=3960000 Contribution margin ratio=(3960000/12000000)=0.33 Break-even point in sales $=230000/0.33=$340000=$696970 3 Estimated sales volume in $=(Fixed cost+Desired profit)/Contribution margin ratio Fixed cost=$85000 Contribution margin ratio=(Contribution/sales) Contribution=Gross margin-Commissions=4800000-(12000000*20%)=2400000 Contribution margin ratio=(2400000/12000000)=0.20 Estimated sales volume in $=(85000+1894750)/0.20=$9898750 4 Estimated sales volume in $=(Fixed cost+Desired profit)/Contribution margin ratio Fixed cost=$85000 Contribution margin ratio=(Contribution/sales) Contribution=Gross margin=4800000 (Ignore commission impact) Contribution margin ratio=(4800000/12000000)=0.40 Estimated sales volume in $=(85000+1894750)/0.40=$4949375

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