Question

Wheels, Inc. manufactures bicycles sold through retail bicycle shops in the southeastern United States. The company has two salespeople that do more than just sell the products- they manage relationships with the bicycle shops to enable them to better meet consumers' needs. The company's sales reps visit the shops several times per year, often for hours at a time. The owner of Wheels is considering expanding to the rest of the country and would like to have distribution through 2,250 bicycle shops. To do so, however, the company would have to hire more salespeople. Each salesperson earns 35,000 plus 5 percent commission on all sales annually. Another alternative is to use the services of sales agents instead of its own sales force. Sales agents would be paid 8 percent of sales. Each sales call lasts approximately 3 hours and each sales rep has approximately 750 hours per year to devote to customers. Wheels needs 18 salespeople if it has 2,250 bicycle shop accounts that need to be called on two times per year. At what level of sales would it be more cost efficient for Wheels to use to sales agents compared to its own sales force? To determine this, consider the fixed and variable costs for each alternative. What are the pros and cons of using a company's own sales force versus independent sales agents?

Answer 1

The level of sales at which it would be more efficient for Wheels to use Sales agents compared to its own sales force would be below the amount up to which cost of selling is equal in either case i.e. either Sales Representatives (Own Sales Force) or Sales Agents.

Lets assume Total Sales to be ' x '

Therefore, The break even sales at which selling cost is equal in both scenarios is computed in the following manner:

Own sale force: 35000 + 0.05 x

Sales Agents: 0.08 x

35000 + 0.05 x = 0.08 x

which implies x = 11,66,667 (Approximately)

At the sales level of 11,66,667 , the selling expenses in either of the scenarios is the same.

Any volume below 11,66,667 would result in cost efficiency if the sales force is represented by sales agents as the entire commission to the class is made up of variable factor whereas in the scenario of own sales force, a partial amount is represented as fixed in nature and remaining is variable to sales.

Pros and Cons of using a company's own sales force versus Independent sales agents:

i) While having an own sales force results in better management of the personnel whereas independent sales agents are not binded under an agreement as stringent as in the case of own sales force.

ii) Own Sales force helps better in establishing long term relationships.

iii) After a certain sales level, own sales force is better cost efficient option to the company.