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Question Three

Alon Company sells homes & kitchen appliances. The company has no sales force of its own, rather, it relies on independent sales agents to market its products. These agents require a $15\%$ sales commission for all items sold.

Alon's budgeted income statement for the next year is as follows:

Recently, the management of Alon learned that their sales agents have been demanding a $20\%$ sales commission, which could lower the company's profits, so the management is considering an alternative of getting their own internal sales force.

Based on their analysis, the company only needs to pay a $7\mathrm{.}5\%$ commission to their own sales people, along with a small salary. But they also need to handle all the promotion costs. The fixed marketing expenses would increase by $$2,700,000$ per year, but the company will also spend less on fixed administrative expenses by $$85,000$ a year.

The breakdown of the $$2,700,000$ cost follows:

$\backslash$table$[[$Salaries:$,],[$Sales manager,$$200,000$

Assume that Alon company decides to continue selling through agents and pays the $20\%$ commission rate. Determine the dollar sales that would be required to generate the same net income as contained in the budgeted income statement for next year. Show all your calculations $(3$ marks$).$

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