Marston Corporation manufactures disposable thermometers that are sold to hospit

ID: 2419914 • Letter: M

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.)

Explanation / Answer

1 a. Marston Corporation Budgeted Income Statement assuming that the independent sales agents' commission rate remains unchanged at 16% 1000 Marston Corporation Budgeted Income Statement (All amounts in thousands of $) Sales $ 33,000.00 Cost of goods sold: Variable $ 17,100.00 Fixed 2,790.00 19,890.00 Gross margin 13,110.00 Selling and administrative expenses: Commissions 5,280.00 Fixed advertising expense 720.00 Fixed administrative expense 3,100.00 9,100.00 Net operating income $ 4,010.00 1 b. Marston Corporation Budgeted Income Statement assuming that the independent sales agents' commission rate increases to 18% 1000 Marston Corporation Budgeted Income Statement (All amounts in thousands of $) Sales $ 33,000.00 Cost of goods sold: Variable $ 17,100.00 Fixed 2,790.00 19,890.00 Gross margin 13,110.00 Selling and administrative expenses: Commissions 5,940.00 Fixed advertising expense 720.00 Fixed administrative expense 3,100.00 9,760.00 Net operating income $ 3,350.00 1 c. Marston Corporation Budgeted Income Statement assuming that the Company employs its own work force 1000 Marston Corporation Budgeted Income Statement (All amounts in thousands of $) Sales $ 33,000.00 Cost of goods sold: Variable $ 17,100.00 Fixed 2,790.00 19,890.00 Gross margin 13,110.00 Selling and administrative expenses: Salaries of Sales Staff 690.00 Commissions to Sales Staff 3,300.00 Travel and Entertainment Exp 330.00 Sales Manager/Support Staff 180.00 Fixed advertising expense 1,140.00 Fixed administrative expense 3,100.00 4,240.00 Net operating income $ 8,870.00 2 a. Break even point in dollars for sales assuming sales commission is unchanged at 16% Breakeven point = Costs incurred Hence, in this case the Breakeven point will be ( $ 33,000 - $ 4,010) * 1000 = $ 28,990,000 2 b. Break even point in dollars for sales assuming sales commission increases to 18% Breakeven point = Costs incurred Hence, in this case the Breakeven point will be ( $ 33,000 - $ 3,350) * 1000 = $ 29,650,000 2 c. Break even point in dollars for sales assuming Company employs its own sales force Breakeven point = Costs incurred Hence, in this case the Breakeven point will be ( $ 33,000 - $ 8,870) * 1000 = $ 24,130,000 3. In case the Company employs its own sales force and earns a net income of $ 8,870 thousands, in order to earn a net income of $ 3,350 thousands, it would have to get a sales volume of $ 12,463.35 thousands. 4. The volume of sales at which the net income irrespective of whether the Company employs its own work force or increases the sales commission to 18% would be the point where the two costs are common Hence,the sales volume would be $ 87,376 thousands.

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Marston Corporation manufactures disposable thermometers that are sold to hospit

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Marston Corporation manufactures disposable thermometers that are sold to hospit

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