Marston Corporation manufactures disposable thermometers that are sold to hospit

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 16% commission on sales, and this commission rate was used when Marston's management prepared the following budgeted absorption income statement for the upcoming year.

     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 18% 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 $690,000, including fringe benefits. The salespeople will also be paid commissions of 10% of sales. Travel and entertainment expenses are expected to total about $330,000 for the year. The company will also have to hire a sales manager and support staff whose salaries and fringe benefits will come to $180,000 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 $420,000.

The independent sales agents' commission rate remains unchanged at 16%.

The independent sales agents' commission rate increases to 18%.

The company employs its own sales force.

The independent sales agents' commission rate increases to 18%.

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 18% commission rate)? (Round the CM ratio to 2 decimal places. Enter your answers in whole dollars and not in thousands.)

Determine the volume of sales at which net operating income would be equal regardless of whether Marston Corporation sells through agents (at a 18% commission rate) or employs its own sales force.(Round the CM ratio to 2 decimal places. Enter your answers in whole dollars and not in thousands.)

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 16% commission on sales, and this commission rate was used when Marston's management prepared the following budgeted absorption income statement for the upcoming year.

Explanation / Answer

Mastron Corporation Contribution Format Income Statement Amts in '000 $ format 1.a.b.c. Details Assuming sales agent Commission 16% Assuming sales agent Commission 18% Assuming Company employs own sales team Sales Revenue                              33,000                           33,000                            33,000 Less Variable costs Variable cost of goods                              17,100                           17,100                            17,100 Sales Commission                                  5,280                             5,940                              3,300 Total Variable costs                              22,380                           23,040                            20,400 Contribution Margin                              10,620                             9,960                            12,600 Less: Fixed costs Fixed Manufacturing Cost                                2,790                             2,790                              2,790 Fixed Advertising Expense                                    720                                 720                              1,140 Payroll sales staff                                  690 Travel & Entertainment                                  330 Salary Sales Manager/Sales staff                                  180 Fixed Admin cost                                3,100                             3,100                              3,100 Total Fixed costs                                6,610                             6,610                              8,230 Net Operating Income                                4,010                             3,350                              4,370 Contribution Margin % 32.18% 30.18% 38.18% 2.a.b.c. BEP $ Sales= Fixed Cost/ Contribution Margin %=                              20,540                           21,901                            21,555               3 If company employs own sales team, net opearting income =$4370 thousand. To generate same incom with sales agent having 18% commission, the required contribution = 4370+6610 =   $                    10,980.00 thousand. Contribution margin =30.18%, So required sales volume to generate same income =10980/30.18% = $                 36,381.71 thousand               4 Let the sales vol is q when net operating income for own sales team & 18% commission are same. so x*0.3018-6610=x*0.3818-8230 0.080 *x=1620 x=20250 So at sales level $20,250 thousand, net opearting income of both the mechanism will be same ($-498 K)

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