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 18% 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			$	39,000,000
Cost of goods sold:
Variable	$	17,400,000
Fixed		2,750,000		20,150,000
Gross margin				18,850,000
Selling and administrative expenses:
Commissions		7,020,000
Fixed advertising expense		780,000
Fixed administrative expense		3,300,000		11,100,000
Net operating income			$	7,750,000

  

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 20% 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 $670,000, including fringe benefits. The salespeople will also be paid commissions of 10% of sales. Travel and entertainment expenses are expected to total about $390,000 for the year. The company will also have to hire a sales manager and support staff whose salaries and fringe benefits will come to $190,000 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 $430,000.

  

Required:
1.	Assuming sales of $39,000,000, 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 18%. (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.)

  

(Click to select)Net operating income (loss)Fixed marketing staff expenseVariable cost of goods soldCommissionsFixed advertising expenseFixed cost of goods soldFixed administrative expenseContribution marginSales	$	%
Variable expenses:
	$
Total variable expense		%
		%
Fixed expenses:
Total fixed expenses
	$

   

b.

The independent sales agents' commission rate increases to 20%. (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 18%. (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 20%. (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 $39,000,000 and the company continues to sell through agents (at a 20% 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 20% 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

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Part 1
		Commission 18%	Commission 20%	Own Sales Force	Working
Sales. . . . . . . . . . . . . . . . . . .		$           39,000,000	$            39,000,000	$          39,000,000
Less: Variable Cost
Variable Manufacturing exp	$          17,400,000		$            17,400,000	$          17,400,000
Agents Commission	$            7,020,000		$               7,800,000	$            3,900,000	10% Commission
Total Variable Cost		$           24,420,000	$            25,200,000	$          21,300,000
Contribution Margin		$           14,580,000	$            13,800,000	$          17,700,000
Less: Fixed Cost
Fixed overhead. . . . . . . . . . . . . . .	$            2,750,000			$            2,750,000
Fixed marketing expenses. . .  . .  . .  . .  . . .	$                780,000			$            1,210,000	Increase by $430,000
Fixed administrative expenses. . . . . . .	$            3,300,000			$            4,550,000	Increase by $670,000+$390,000+$190,000
Total Fixed Cost		$             6,830,000	$               6,830,000	$            8,510,000
Net Operating Income		$             7,750,000	$               6,970,000	$            9,190,000
Income before income taxes		$             7,750,000	$               6,970,000	$            9,190,000
Net Income		$             7,750,000	$               6,970,000	$            9,190,000
Part 2
a. BEP with 18% Comission
BEP=Fixed Cost/Contribution Margin
Fixed Cost (Fixed Cost+Interest)	$            6,830,000
Contribution Margin (CM/Sales)	37.38%
BEP (Fixed Cost/CM Ratio)	$          18,269,547
b. BEP with 20% Comission
Fixed Cost (Fixed Cost+Interest)	$            6,830,000
Contribution Margin (CM/Sales)	35.38%
BEP (Fixed Cost/CM Ratio)	$          19,302,174
c. BEP with own sales force
Fixed Cost (Fixed Cost+Interest)	$            8,510,000
Contribution Margin (CM/Sales)	45.38%
BEP (Fixed Cost/CM Ratio)	$          18,750,847
3. TO maintain budgeted Net Income
To maintain budgeted Net Income $2,053,800 i.e. $2,934,000 before tax income
(Fixed Cost+Target Profit)/Contribution Margin
Fixed Cost at 20% Commission	$            6,830,000	From b Above	a
Contribution Margin at 20% commission	35.38%	From b Above	b
Target Income before tax	$            6,970,000		c
Target Sales (a+c)/b	$          39,000,000
4. Equal Net income
Let Sale be x
	20% Commission	Own Sales force
Let Sale be	x	x
Variable Cost Ratio (100-Margin Ratio)	65%	54.62%
Fixed Cost (From b and c)	$            6,830,000	$             8,510,000
0.65x+6830000=0.5462x+8510000
x=	$          16,800,000