Question

partial credit, P3-48 (similar to) Marston Corporation manufactures housewares products that are sold through a network of external sales agents. The agents are paid a commission of 19​% of revenues. Marston is considering replacing the sales agents with its own​ salespeople, who would be paid a commission of 10​% of revenues and total salaries of $ 2 comma 520 comma 000. The income statement for the year ending December​ 31, 2017​, under the two scenarios is shown here. Marston Corporation Income Statement For the Year Ended December 31, 2017 Using Sales Agents Using Own Sales Force Revenues $28,000,000 $28,000,000 Cost of goods sold Variable $13,160,000 $13,160,000 Fixed 3,170,000 16,330,000 3,170,000 16,330,000 Gross Margin 11,670,000 11,670,000 Marketing costs Commissions $5,320,000 $2,800,000 Fixed costs 2,644,000 7,964,000 5,164,000 7,964,000 Operating income $3,706,000 $3,706,000 Calculate Marston​'s 2017 contribution margin​ percentage, breakeven​ revenues, and degree of operating leverage under the two scenarios. 2. Describe the advantages and disadvantages of each type of sales alternative. 3. In 2018​, Marston uses its own​ salespeople, who demand a 15​% commission. If all other cost behavior patterns are​ unchanged, how much revenue must the salespeople generate in order to earn the same operating income as in 2017​?

Answer 1

Marston Corporation
Income Statement For the Year Ended December 31, 2017
	Using Sales Agents	Using Own Sales Force
Revenues	28,000,000	28,000,000
Less:Cost of goods sold
Variable	13,160,000	13,160,000
Fixed	3,170,000	3,170,000
Total COGS	16,330,000	16,330,000
Gross Margin	11,670,000	11,670,000
Marketing costs
Commissions(19% & 10% *sales revenue)	5,320,000	2,800,000
Fixed costs	2,644,000	5,164,000
Total mkg.costs	7,964,000	7,964,000
Operating income	3,706,000	3,706,000

Re-stating the above income statement in contribution -margin format
Marston Corporation
Income Statement For the Year Ended December 31, 2017
	Using Sales Agents	Using Own Sales Force
Revenues	28,000,000	28,000,000
Less: Variable costs:
COGS	13,160,000	13,160,000
Marketing costs
Commissions(19% & 10% *sales revenue)	5,320,000	2,800,000
Total Variable costs	18,480,000	15,960,000
Contribution Margin	9,520,000	12,040,000
Less: Fixed Costs:
COGS	3,170,000	3,170,000
Marketing costs	2,644,000	5,164,000
Total Fixed costs	5,814,000	8,334,000
Operating income	3,706,000	3,706,000
Contribution Margin percentage
Contn./Sales	9520000/28000000=	12040000/28000000=
	34%	43%
Break-even Revenue
Fixed costs/Contribution margin percentage
	5814000/34%=	8334000/43%=
	17100000	19381395
Degree of Opertaing Leverage(DOL)
Contribution/NetOpg. Income	9520000/3706000=	12040000/3706000=
	2.57	3.25

2..

Using sales agents:

Advantages :

1. Can set targets for sales to be generated ,strictly, while appointing or when entering into agreement with the agent.

2.Company can concentrate on other developmental activities & rest reasonably certain about the sales revenues that will be achieved.

Disadvantages:

1. Revenues guaranteed come with increased costs like commission & other related expenditures.

2.Frequent changing of external agents ,if they fail to deliver , may spoil the name of the company ,in the industry.

Using own sales force:

Advantages :

1. Can be worked out with our own employees , according to revenue & hence flexible and not rigid.

2.Less costlier option &hence improves contribution to meet fixed costs of teh company.

Disadvantages:

1.Not certain about the quantum of sales revenues.

2. The sales staff tend to become complacent ,so the company has tokeep on organising meetings & pep-talks , every now & then.

3. To earn the same operating income in 2018, as in 2017, the contribution (as seen from the contribution-format income statement )should be     12040000

We know that ,

Variable COGS= 13160000/28000000=

47%

so, forming an equation ,

Total Contribution=$ sales-$ variable costs

If we suppose sales revenue as $ X

ie. 12040000=X-47%*X-15%*X

Solving for X , we get the sales revenue to be generated by the sales people as:

31684200