Naftel Company Limited manufactures and sells electrical products through a network of sales agents in Australia...

 

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Naftel Company Limited manufactures and sells electrical products through a network of sales agents in Australia and New Zealand. The agents are currently paid a 18 percent commission on sales; that percentage was used when Naftel prepared the following budgeted income statement for the fiscal year ending September 30, 2020: Since the completion of the income statement, Naftel has learned that its sales agents are requiring a 5% increase in their commission rate (to 23%) for the upcoming year. As a result, Nafteľ's president has decided to investigate the possibility of hiring its own sales staff in place of the network of sales agents and has asked Richard Atkinson, Naftelľ's controller, to gather information on the costs associated with this change. Richard estimates that Naftel must hire ten salespeople to cover the current market area, at an average annual payroll cost for each employee of $90,000, including fringe benefits expense. Travel and entertainment expenses is expected to total $500,000 for the year, and the annual cost of hiring a sales managerand sales secretary will be $160,000. In addition to their salaries, the ten salespeople will each earn commissions at the rate of 8% of sales. The president believes that Naftel also should increase its advertising budget by $400,000 if the ten salespeople are hired. Naftel Company Limited Budgeted Income Statement For the Year Ending September 30, 2020 Sales $ 2,280,000 Cost of goods sold Variable 1,026,000 1,306,000 974,000 Fixed 280,000 Gross profit Selling and administrative costs Commissions 410,400 Fixed advertising cost 64,000 Fixed administrative cost 172,000 646,400 Net Operating income 327,600 Required: Question 1.1 Determine Nafteľ's breakeven point in sales dollars for the fiscal year ending September 30, 2020 if the company hires its own sales force and increases its advertising costs. Provide a check on your answer by constructing a contribution income statement. Your Answer (add extra rows/columns to the template if required): (6 marks) Question 1.2 If Naftel continues to sell through its network of sales agents and pays the higher commission rate, determine the estimated volume in sales dollars for the fiscal year ending September 30, 2020, that would be required to generate the same operating profit as the one contained in the budgeted income statement. Show your workings. (4 marks) Your Answer (add extra rows/columns to the template if required): Required Sales Volume Show your workings here (expand the space as required): Naftel Company Limited manufactures and sells electrical products through a network of sales agents in Australia and New Zealand. The agents are currently paid a 18 percent commission on sales; that percentage was used when Naftel prepared the following budgeted income statement for the fiscal year ending September 30, 2020: Since the completion of the income statement, Naftel has learned that its sales agents are requiring a 5% increase in their commission rate (to 23%) for the upcoming year. As a result, Nafteľ's president has decided to investigate the possibility of hiring its own sales staff in place of the network of sales agents and has asked Richard Atkinson, Naftelľ's controller, to gather information on the costs associated with this change. Richard estimates that Naftel must hire ten salespeople to cover the current market area, at an average annual payroll cost for each employee of $90,000, including fringe benefits expense. Travel and entertainment expenses is expected to total $500,000 for the year, and the annual cost of hiring a sales managerand sales secretary will be $160,000. In addition to their salaries, the ten salespeople will each earn commissions at the rate of 8% of sales. The president believes that Naftel also should increase its advertising budget by $400,000 if the ten salespeople are hired. Naftel Company Limited Budgeted Income Statement For the Year Ending September 30, 2020 Sales $ 2,280,000 Cost of goods sold Variable 1,026,000 1,306,000 974,000 Fixed 280,000 Gross profit Selling and administrative costs Commissions 410,400 Fixed advertising cost 64,000 Fixed administrative cost 172,000 646,400 Net Operating income 327,600 Required: Question 1.1 Determine Nafteľ's breakeven point in sales dollars for the fiscal year ending September 30, 2020 if the company hires its own sales force and increases its advertising costs. Provide a check on your answer by constructing a contribution income statement. Your Answer (add extra rows/columns to the template if required): (6 marks) Question 1.2 If Naftel continues to sell through its network of sales agents and pays the higher commission rate, determine the estimated volume in sales dollars for the fiscal year ending September 30, 2020, that would be required to generate the same operating profit as the one contained in the budgeted income statement. Show your workings. (4 marks) Your Answer (add extra rows/columns to the template if required): Required Sales Volume Show your workings here (expand the space as required):

Answer rating: 100% (QA)

Calculation of Break Even Point if company hires sales people Fixed Cost Contribution Margin Ratio 2... View the full answer