Fall 2014 Individual Case Assignment 2 Essay

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ACC 211
Managerial Accounting Information for Decision-Making
Fall 2014

Individual Case Assignment

Due: Monday, October 20th

Read Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items sold. Linda Cheney, Read’s Controller, has just prepared the company’s budgeted income statement for next year. The budgeted income statement follows:

Read Company
Budgeted Income Statement
For the Year Ended December 31, 2015

As Linda handed the statement to Karl Vector, Read’s President, she commented, “I went ahead and used the agents’ 15% commission rate in completing these statements, but we’ve just learned that they refuse to handle our products next year unless we increase the commission rate to 20%.” “That’s the last straw,” Karl replied angrily. “Those agents have been demanding more and more, and this time they’ve gone too far. How can they possible defend a 20% commission rate?” “They claim after paying for advertising, travel, and other costs of promotion, there’s nothing left over for profit,” replied Linda. “I say it’s just plain robbery,” retorted Karl. “And I also say it’s time we dumped those guys and got our own sales force. Can you get your people to work up some cost figures for us to look at?” “We’ve already worked them up,” said Linda. “Several companies we know about pay a 7.5% commission to their own sales people, along with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fixed expenses would increase by $2,400,000 per year, but that would be more than offset by the $3,200,000 (20% x $16,000,000) that we would avoid on agents’ commissions. The breakdown of the $2,400,000 cost follows: “Super,” replied Karl, “And I noticed that the $2,400,000 is just what we’re paying the agents under the old 15% commission rate.” “It’s even better than that,” explained Linda. “We can actually save $75,000 a year because that’s what we’re having to pay the auditing firm now to check out the agents’ reports. So our overall administrative expenses would be less.” “Put all of these numbers together and we’ll show them to the executive committee tomorrow,” said Karl. “With the approval of the committee, we can move on the matter immediately.”

Required:
1. Calculate Reed Company’s break-even point in sales dollars for next year assuming:

a. The
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