ications equipment. Their manufacturing overhead Heron Company is a small but gr
ID: 2562621 • Letter: I
Question
ications equipment. Their manufacturing overhead Heron Company is a small but growing manufacturer of telecommun costs are all fixed. The cost structure of all expenses are inflexible, except s force of its own; at the moment, it relies completely on independent sales age 8 ales force cost. The company has no sales Heron is considering employing its own sales force. In the proposed plan, salespersons will be paid a small fixed salary than the market. Compared with the current budget, such a change will increase the fixed marketing expenses but reduce commissions as follows: of Sales Commission rate Total fixed marketing expense 12% $ 1,660 20% 260 Tammy Shahaf, Heron's controller, has just prepared the company's budgeted income statement tor current plan for salesforce. The statement follows: Heron Company Budgeted Income Statement 12/3 1/2016 Sales 20,250 2,025 4,050 2,940 6,925 Direct materials Dircct labor Fixed manufacturing overhead Net operating income Determine the sales at which net income would be equal regardless of whether Heron Company sells through agents (at the current commission rate) or employs its own sales force. Choose the closest answer. A. $ 17,500 B. s 54,250 C. 19,871 D. s 20,750 $ 20,250 Page 6 of 12Explanation / Answer
The only difference between the proposed and the current is the commission rate and the total fixed marketing expenses.
Sales less commission rate and the total fixed marketing expenses in the proposed has to be equal to the sales less commission rate and the total fixed marketing expenses in the current.
Sales - (sales*12%) - 1,660 = Sales - (sales*20%) - 260
0.88Sales - 1,660 = 0.8Sales - 260
0.08Sales = 1,400
Sales = 17,500.
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