Seattle Telecom, Inc. manufactures telecommunications equipment. The company has always b een 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: SEATTLE TELECOM, INC. Budgeted Income Statement For the Year Ended December 31, 20x5 (in thousands) Sales ........................................................................................................................ $24,000 Manufacturing costs: Variable ................................................................................................................. $10,800 Fixed overhead ...................................................................................................... 3,510 14,310 Gross margin ............................................................................................................. $ 9,690 Selling and administrative expenses: Commissions ......................................................................................................... $ 3,600 Fixed marketing expenses ...................................................................................... 210 Fixed administrative expenses ................................................................................ 2,670 6,480 Net operating income ................................................................................................. $ 3,210 Less fixed interest expense ......................................................................................... 810 Income before income taxes ....................................................................................... $ 2,400 Less income taxes (30%) ........................................................................................... 720 Net income ................................................................................................................ $ 1,680 After the profit plan was completed for the coming year, Seattle 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 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 commission 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 22½ 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 22½ percent of the selling price or employs its own sales force.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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Seattle Telecom, Inc. manufactures telecommunications equipment. The company has always b een 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:
SEATTLE TELECOM, INC.
Budgeted Income Statement
For the Year Ended December 31, 20x5
(in thousands)
Sales ........................................................................................................................ $24,000
Manufacturing costs:
Variable ................................................................................................................. $10,800
Fixed overhead ...................................................................................................... 3,510 14,310
Gross margin ............................................................................................................. $ 9,690
Selling and administrative expenses:
Commissions ......................................................................................................... $ 3,600
Fixed marketing expenses ...................................................................................... 210
Fixed administrative expenses ................................................................................ 2,670 6,480
Net operating income ................................................................................................. $ 3,210
Less fixed interest expense ......................................................................................... 810
Income before income taxes ....................................................................................... $ 2,400
Less income taxes (30%) ........................................................................................... 720
Net income ................................................................................................................ $ 1,680
After the profit plan was completed for the coming year, Seattle 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 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 commission 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 22½
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 22½
percent of the selling price or employs its own sales force. 

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