An insurance company is considering using independent sales agents who would receive 7 percent sales commission on sales or its own insurance salespeople who would receive 5 percent commission,salaries,and benefits.Additionally,with a company salesforce,sales administration costs would be incurred for a total fixed cost of $650,000 per year.At what level of sales would independent salespeople be less costly?

Question

Quizplus · Accepted Answer

Let's assume that the total sales are X dollars.
For independent sales agents:
Commission cost = 7% of X
Sales administration cost = 0
Total cost = 7% of X

For company salesforce:
Commission cost = 5% of X
Sales administration cost = $650,000
Total cost = 5% of X + $650,000

The independent salespeople would be less costly if their total cost is less than the total cost of company salesforce.
7% of X < 5% of X + $650,000
2% of X < $650,000
X < $32,500,000
Therefore, if the total sales are less than $32,500,000, independent sales agents would be less costly. If the total sales exceed $32,500,000, the company salesforce would be less costly. Therefore, the correct answer is C.

An Insurance Company Is Considering Using Independent Sales Agents Who