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 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.

     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 $630,000, including fringe benefits. The salespeople will also be paid commissions of 10% of sales. Travel and entertainment expenses are expected to total about $360,000 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 $470,000.

The independent sales agents' commission rate remains unchanged at 18%.

The independent sales agents' commission rate increases to 20%.

The company employs its own sales force.

The independent sales agents' commission rate increases to 20%.

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 $31,000,000 and the company continues to sell through agents (at a 20% 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 20% 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 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.

Explanation / Answer

1 a.As commision is paid on the basis of sales so it is a variable expense commision=.18*31,000,000= $5,580,000
total revenue $31,000,000

less
cost of goods sold
variable expenses $17,200,000
commision 18% $5,580,000 ($22,780,000)

contribution margin $8,220,000

less fixed expenses
fixed cost of goods sold $2,750,000
fixed administrative $2,700,000
Fixed advertising $790,000 ($6,240,000)

Operating income $1,980,000

b. As commision is paid on the basis of sales so it is a variable expense commision =.20*31,000,000= $6,200,000
total revenue $31,000,000

less
cost of goods sold
variable expenses $17,200,000
commision 20% $6,200,000 ($23,400,000)

contribution margin $7,600,000

less fixed expenses
fixed cost of goods sold $2,750,000
fixed administrative $2,700,000
Fixed advertising $790,000 ($6,240,000)

Operating income $1,360,000

c. commision is variable expense uoto 10% which is paid on sales commision = .10*31,000,000= $3,100,000
fixed advertising = $790,000 +470,000= $1,260,000
fixed administrative = $2,700,000 + $630,000 +$190,000 $360,000= $3,880,000
total revenue $31,000,000

less
cost of goods sold
variable expenses $17,200,000
commision 20% $3,100,000 ($20,300,000)

contribution margin $10,700,000

less fixed expenses
fixed cost of goods sold $2,750,000
fixed administrative $3,880,000
Fixed advertising $1,260,000 ($7,890,000)

Operating income $2,810,000

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