Colorado 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. Colorado Telecom's budgeted Income statement for 20x2 follows: COLORADO TELECOM, INC. Budgeted Income statement For the Year Ended December 31, 20x2 (in thousands) Sales Manufacturing costs: Variable Fixed overhead Gross margin selling and administrative expenses: Commissions Fixed marketing expenses Fixed administrative expenses Net operating income Less fixed interest expense Income before income taxes Less income taxes (30%) Net income Estimated Annual Cost of Employing a Company Sales Force (in thousands) Salaries: sales manager sales personnel Travel and entertainment Fixed marketing costs Total After the profit plan was completed for the coming year, Colorado Telecom's sales agents demanded that the commissions be Increased to 22½ percent of the selling price. This demand was the latest in a series of actions that Liliana Richmond, the company's president, believed had gone too far. She asked Molly Rosewood, the most sales-oriented officer in her production-oriented company. to estimate the cost to the company of employing its own sales force. Rosewood's estimate of the additional annual cost of employing Its own sales force, exclusive of commissions, follows. Sales personnel would receive a commission of 10 percent of the selling price in addition to their salary. $7,500 2,340 $ 100 1,000 400 900 $2,400 $20,000 1-a. Break-even sales dollars 1-b. Break-even sales dollars 2. Volume in sales dollars Volume in sales dollars 3. 9,840 $10,160 $2,400 140 1,520 4,060 $ 6,100 500 $ 5,600 1,680 $ 3,920 Required: 1. Calculate Colorado Telecom's estimated break-even point in sales dollars for 20x2. 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 Colorado Telecom continues to sell through agents and pays the increased commission of 22½ percent of the selling price, determine the estimated volume in sales dollars for 20x2 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 20x2 regardless of whether the company continues to sell through agents and pays a commission of 22½ percent of the selling price or employs its own sales force. (For all requirements, do not round Intermediate calculations and enter your answers in whole dollars, not in thousands of dollars.
Colorado 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. Colorado Telecom's budgeted Income statement for 20x2 follows: COLORADO TELECOM, INC. Budgeted Income statement For the Year Ended December 31, 20x2 (in thousands) Sales Manufacturing costs: Variable Fixed overhead Gross margin selling and administrative expenses: Commissions Fixed marketing expenses Fixed administrative expenses Net operating income Less fixed interest expense Income before income taxes Less income taxes (30%) Net income Estimated Annual Cost of Employing a Company Sales Force (in thousands) Salaries: sales manager sales personnel Travel and entertainment Fixed marketing costs Total After the profit plan was completed for the coming year, Colorado Telecom's sales agents demanded that the commissions be Increased to 22½ percent of the selling price. This demand was the latest in a series of actions that Liliana Richmond, the company's president, believed had gone too far. She asked Molly Rosewood, the most sales-oriented officer in her production-oriented company. to estimate the cost to the company of employing its own sales force. Rosewood's estimate of the additional annual cost of employing Its own sales force, exclusive of commissions, follows. Sales personnel would receive a commission of 10 percent of the selling price in addition to their salary. $7,500 2,340 $ 100 1,000 400 900 $2,400 $20,000 1-a. Break-even sales dollars 1-b. Break-even sales dollars 2. Volume in sales dollars Volume in sales dollars 3. 9,840 $10,160 $2,400 140 1,520 4,060 $ 6,100 500 $ 5,600 1,680 $ 3,920 Required: 1. Calculate Colorado Telecom's estimated break-even point in sales dollars for 20x2. 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 Colorado Telecom continues to sell through agents and pays the increased commission of 22½ percent of the selling price, determine the estimated volume in sales dollars for 20x2 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 20x2 regardless of whether the company continues to sell through agents and pays a commission of 22½ percent of the selling price or employs its own sales force. (For all requirements, do not round Intermediate calculations and enter your answers in whole dollars, not in thousands of dollars.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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