Seattle Telecom, Inc. manufactures telecommunications equipment. The company has always been production oriented and sells its products through agents. Agents are paid a commission of 15 percent of the selling price. Seattle Telecom’s budgeted income statement for 20x5 follows:

After the profit plan was completed for the coming year, Seattle Telecom’s sales agents demanded that the commissions be increased to 22 ½ percent of the selling price. This demand was the latest in a series of actions that Vinnie McGraw, the company’s president, believed had gone too far. He asked Dana Massa, the most sales-oriented officer in his production-oriented company, to estimate the cost to Seattle Telecom of employing its own sales force. Massa’s estimate of the additional annual cost of employing its own sales force, exclusive of commissions, follows. Sales personnel would receive a com-mission of 10 percent of the selling price in addition to their salary. Estimated Annual Cost of Employing a Company Sales Force (in thousands) Salaries:
Sales manager................................................................. $ 150
Sales personnel............................................................... 1,500
Travel and entertainment............................................... 600
Fixed marketing costs.................................................... 1,350
Total...............................................................................$3,600

Required:
1. Calculate Seattle Telecom’s estimated break- even point in sales dollars for 20x5.
a. If the events that are represented in the budgeted income statement take place.
b. If the company employs its own sales force.
2. If Seattle Telecom continues to sell through agents and pays the increased commission of 22 ½ percent of the selling price, determine the estimated volume in sales dollars for 20x5 that would be required to generate the same net income as projected in the budgeted income statement.
3. Determine the estimated volume in sales dollars that would result in equal net income for 20x5 regardless of whether the company continues to sell through agents and pays a commission of 22 ½ percent of the selling price or employs its own sales force.

Transcribed Image Text:

SEATTLE TELECOM, INC. Budgeted Income Statement For the Year Ended December 31,20x5 in thousands) Sales Manufacturing costs: $24,000 Variable Fixed overhead $10,800 3,510 14310 9,690 Gross margin Selling and administrative expenses 3,600 210 2,670 CommissionS Fixed marketing expenses 6,490 3,210 810 2,400 720 1.690 Fixed administrative expenses Net operating income Less fixed interest expense Less income taxes (30%) Net income .