Charleston Corporation manufactures syringes that are sold to hospitals through a network of independent sales agents located in the U.S., Mexico, and Canada.These agents sell a variety of products to hospitals in addition to Charlestonâ€s syringes.The sales agents are currently paid a 15% commission on sales.This commission rate was used when Charleston prepared the following budgeted income statement for the upcoming year.
Budgeted Income Statement:
Less Cost of Goods Sold:
Gross Margin $12,600,000
Less Selling and Administrative Expenses:
Fixed Selling & Admin. Expenses 5,500,000 11,500,000
Net Income $ 1,100,000
Since the completion of this statement, Charlestonâ€s management has learned that the independent sales agents are demanding an increase in the commission rate to 16% of sales for the upcoming year.This would be the third increase in commissions demanded by the independent sales agents in five years.As a result, Charlestonâ€s management has decided to investigate the possibility of hiring its own sales staff to replace the independent sales agents.
Charlestonâ€s controller estimates that the company would have to hire 28 salespeople to cover the current market area, and the total annual salary cost of these employees would be about $1,136,000.The sales people would also be paid commissions of 10% of sales.Travel and entertainment expenses (fixed) are expected to total about $600,000 for the year.The company would also have to hire a sales manager and support staff whose total salaries would be $180,000 per year.To make up for the advertising that the independent sales agents had been doing on behalf of Charleston, management believes the companyâ€s budget for fixed advertising expenses should increase by $300,000.(All of the fixed costs mentioned in this paragraph are in addition to those already in the budgeted income statement above.)
a. The independent sales agent commission rate increases to 16%.
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