Question

Seco Corp., a wholesale supply company, uses independent sales agents to market the company's
products. These agents currently receive a commission of 20% of sales, but are demanding an
increase to 25% of sales. Seco had already prepared its budget for next year before learning of the
sales agents' demand for an increase in commissions. That budgeted income statement appears
below:
SECO CORP.
Budgeted Income Statement

Sales $10,000,000
Cost of sales 6,000,000
Gross margin 4,000,000
Selling and administrative expenses:
Commissions $2,000,000
All other expenses (fixed) 100,000 2,100,000
Operating income $1,900,000

Seco is considering the possibility of employing its own salespersons. Three individuals would be
required, at a salary of $30,000 each, plus commissions of 5% of sales. In addition, a sales manager
would be employed at a fixed annual salary of $160,000.

Required:
A. Compute Seco's break-even point in sales dollars based upon the company's budgeted
income statement, assuming that the company continues to use independent sales
agents and that they are paid the old commission rate of 20% of sales.

B. Compute Seco's break-even point in sales dollars, assuming that the company employs
its own salespersons.

C. Compute the sales dollars required to attain the target profit of $1,900,000, assuming
that the company continues to use independent sales agents and the company agrees
to their demand for a 25% sales commission.

D. Compute the sales dollars that would be required to generate the same operating
income, whether Seco employs its own salespersons or continues to use the
independent sales agents and pays them a 25% commission.

E. Identify two non-financial considerations that should also be included when making this
decision.

Answer 1

Ans:

A.

Calculation of break even point :

Sales : $10,000,000

Variable costs :

Cost of sales : $6,000,000

Commission : $2,000,000

Contribution : $10,000,000 - $6,000,000 - $2,000,000 = $2,000,000

Contribution Margin : 2,000,000 / 10,000,000 = 20%

Fixed costs : $100,000

Break Even Sales : Fixed costs / Contribution margin

= $100,000 /20% = $500,000

B.

If company Employ its own sales persons:

Sales : $10,000,000

Variable costs :

Cost of sales : $6,000,000

Commission : $500,000 (5% of sales)

Contribution : $10,000,000 - $6,000,000 - $500,000 = $3,500,000

Contribution Margin : 3,500,000 / 10,000,000 = 35%

Fixed costs : $100,000 + ($30,000*3 + $160,000) = $350,000

Break Even Sales : Fixed costs / Contribution margin

= $350,000 / 35% = $1,000,000

C.

Target Profit : $1,900,000

Revised sales commission 25%

At Sales : $10,000,000

Variable costs :

Cost of sales : $6,000,000

Commission : $2,500,000

Contribution : $10,000,000 - $6,000,000 - $2,500,000 = $1,500,000

Contribution Margin : 1,500,000 / 10,000,000 = 15%

Fixed costs : $100,000

Sales : (Fixed costs + Target Profit) / Contribution margin

= ($100,000+$1,900,0000 /15% = $13,333,333

D.

Sales required if they use own Sales person:

Sales : $10,000,000

Variable costs :

Cost of sales : $6,000,000

Commission : $500,000 (5% of sales)

Contribution : $10,000,000 - $6,000,000 - $500,000 = $3,500,000

Contribution Margin : 3,500,000 / 10,000,000 = 35%

Fixed costs : $100,000 + ($30,000*3 + $160,000) = $350,000

Sales : (Fixed costs + Target Profit) / Contribution margin

= ($350,000 + $1,900,000) / 35% = $6,428,571

So own sales persons are beneficial for company.

E.

Non financial condition should be considered are:

• The capability of sales persons, so that company can acheive its desired sales level.
• Availability of good sales persons at estimated costs.

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