Question

Marston Corporation manufactures disposable thermometers that are sold to hospitals through a network of independent sales agents located in the United States and Canada. These sales agents sell a variety of products to hospitals in addition to Marston's disposable thermometer. The sales agents are currently paid an 19% commission on sales, and this commission rate was used when Marston's management prepared the following budgeted absorption income statement for the upcoming year.

Marston Corporation Budgeted Income Statement Sales $ 33,000,000

Cost of goods sold:

Variable $ 17,100,000

Fixed 2,710,000

19,810,000

Gross margin 13,190,000

Selling and administrative expenses:

Commissions 6,270,000

Fixed advertising expense 700,000

Fixed administrative expense 2,800,000

9,770,000

Net operating income $ 3,420,000

Since the completion of the above statement, Marston’s management has learned that the independent sales agents are demanding an increase in the commission rate to 21% 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, Marston’s management has decided to investigate the possibility of hiring its own sales staff to replace the independent sales agents. Marston's controller estimates that the company will have to hire eight salespeople to cover the current market area, and the total annual payroll cost of these employees will be about $610,000, including fringe benefits. The salespeople will also be paid commissions of 10% of sales. Travel and entertainment expenses are expected to total about $310,000 for the year. The company will also have to hire a sales manager and support staff whose salaries and fringe benefits will come to $170,000 per year. To make up for the promotions that the independent sales agents had been running on behalf of Marston, management believes that the company’s budget for fixed advertising expenses should be increased by $470,000.

Required: 1. Assuming sales of $33,000,000, construct a budgeted contribution format income statement for the upcoming year for each of the following alternatives: a. The independent sales agents' commission rate remains unchanged at 19%. (Input all amounts as positive values except losses which should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Enter your answers in thousands. Round your percentage answers to the nearest whole percent.) $ % Variable expenses: $ Total variable expense % % Fixed expenses: Total fixed expenses $

b. The independent sales agents' commission rate increases to 21%. (Input all amounts as positive values except losses which should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Enter your answers in thousands. Round your percentage answers to the nearest whole percent.) $ % Variable expenses: $ Total variable expense % % Fixed expenses: Total fixed expenses $

c. The company employs its own sales force. (Input all amounts as positive values except losses which should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Enter your answers in thousands. Round your percentage answers to the nearest whole percent.) $ % Variable expenses: $ Total variable expense % % Fixed expenses: Total fixed expenses $

2. Calculate Marston Corporation's break-even point in sales dollars for the upcoming year assuming the following: a. The independent sales agents' commission rate remains unchanged at 19%. (Round the CM ratio to 2 decimal places and final answer to the nearest dollar amount. Enter your answers in whole dollars and not in thousands.)

Break-even point in sales dollars $

b. The independent sales agents' commission rate increases to 21%. (Round the CM ratio to 2 decimal places and final answer to the nearest dollar amount. Enter your answers in whole dollars and not in thousands.) Break-even point in sales dollars $

c. The company employs its own sales force. (Round the CM ratio to 2 decimal places and final answer to the nearest dollar amount. Enter your answers in whole dollars and not in thousands.) Break-even point in sales dollars $

3. Refer to your answer to (1)(b) above. If the company employs its own sales force, what volume of sales would be necessary to generate the net operating income the company would realize if sales are $33,000,000 and the company continues to sell through agents (at a 21% commission rate)? (Round the CM ratio to 2 decimal places and final answer to the nearest dollar amount. Enter your answers in whole dollars and not in thousands.) Volume of sales $

4. Determine the volume of sales at which net operating income would be equal regardless of whether Marston Corporation sells through agents (at a 21% commission rate) or employs its own sales force. (Round the CM ratio to 2 decimal places and final answer to the nearest dollar amount. Enter your answers in whole dollars and not in thousands.) Volume of sales $

Answer 1

Required: 1. Assuming sales of $33,000,000, construct a budgeted contribution format income statement for the upcoming year for each of the following alternatives: a. The independent sales agents' commission rate remains unchanged at 19%.
a	The independent sales agents' commission rate remains unchanged at 19%
	Sales		$33,000,000
	Less : Variable cost of Goods Sold		17100000
	Commissions		6270000
	Total Variable costs		23370000	70.82%
	Contribution Margin		$9,630,000	29.18%
	Less : Fixed Costs
	Fixed Cost of Goods Sold		2710000
	Advertising expenses		700000
	Administrative expense		2800000
	Total Fixed Costs		6210000	18.82%
	Net Operating Income		$3,420,000
b	The independent sales agents' commission rate increases to 21%
	Sales		$33,000,000
	Less : Variable cost of Goods Sold		17100000
	Commissions		$6,930,000
	Total Variable costs		24030000	72.82%
	Contribution Margin		$8,970,000	27.18%
	Less : Fixed Costs
	Fixed Cost of Goods Sold		2710000
	Advertising expenses		700000
	Administrative expense		2800000
	Total Fixed Costs		6210000	18.82%
	Net Operating Income		$2,760,000
c	The company employs its own sales force
	Sales		$33,000,000
	Less : Variable cost of Goods Sold		17100000
	Commissions		$3,300,000
	Total Variable costs		20400000	61.82%
	Contribution Margin		$12,600,000	38.18%
	Less : Fixed Costs
	Fixed Cost of Goods Sold		2710000
	Advertising expenses		1170000
	Administrative expense		2800000
	Payroll Expense		$610,000
	Travel and Entertainment Expenses		$310,000
	Sales manager and support staff		$170,000
	Total Fixed Costs		7770000	23.55%
	Net Operating Income		$4,830,000
2	Calculate Marston Corporation's break-even point in sales dollars for the upcoming year assuming the following
a	The independent sales agents' commission rate remains unchanged at 19%
	Break Even Point =		Fixed Expenses/Contribution Margin Ratio
			6210000/0.2918
		$	21281700
b	The independent sales agents' commission rate increases to 21%
	Break Even Point =		Fixed Expenses/Contribution Margin Ratio
			6210000/0.2718
			22847682
c	Break Even Point =		Fixed Expenses/Contribution Margin Ratio
			7770000/0.3818
			22847682
3	Total Fixed Costs		7770000
	Net Operating Income(21% commission)		$2,760,000
	Total		10530000
	Contribution Ratio		38.18%
	Sales Volume	$	27579885
4	Contribution Margin		27.18%	38.18%
	Total Fixed Costs		6210000	7770000
	0.2718*Sales - 6210000 = 0.3818*Sales -7770000
	0.11*Sales = 1560000
	Sales	1560000/0.11
	Sales	14181818