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 20% 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 22% 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 $310,000 for the year. The company will also have to hire a sales manager and support staff whose salaries and fringe benefits will come to $110,000 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 $500,000.

  

Assuming sales of $30,000,000, construct a budgeted contribution format income statement for the upcoming year for each of the following alternatives (Enter your answers in thousands of dollars (i.e., 15,000,000 should be entered as 15,000.)):

a.The independent sales agents' commission rate remains unchanged at 20%.

b.The independent sales agents' commission rate increases to 22%.

  c.The company employs its own sales force.

2. Calculate Marston Corporation's break-even point in sales dollars for the upcoming year assuming the following: (Round the CM ratio to 2 decimal places. Enter your answers in whole dollars and not in thousands.)

a.The independent sales agents' commission rate remains unchanged at 20%.

Break even point in sales dollars:

b.The independent sales agents' commission rate increases to 22%.

Break even point in sales dollars:

c.The company employs its own sales force.

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 $30,000,000 and the company continues to sell through agents (at a 22% commission rate)? (Round the CM ratio to 2 decimal places. Enter your answers in whole dollars and not in thousands.)

Volume of sales (In dollars):

4.Determine the volume of sales at which net operating income would be equal regardless of whether Marston Corporation sells through agents (at a 22% 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.)

Volume of sales in dollars:

         

Marston Corporation
Budgeted Income Statement   Sales $ 30,000,000   Cost of goods sold:       Variable $ 17,500,000       Fixed 2,730,000 20,230,000   Gross margin 9,770,000   Selling and administrative expenses:       Commissions 6,000,000       Fixed advertising expense 750,000       Fixed administrative expense 2,900,000 9,650,000   Net operating income $ 120,000

Explanation / Answer

Answer 1

Answer 2

Working notes

Break even point in sales dollars: => Fixed cost / Contribution Margin

Breakeven point in sales dollars at 20% => 6380000/22% => $29000000

Breakeven point in sales dollars at 22% => 5900000/20% => $29500000

Breakeven at own force => 9500000/32% => $29687500

Answer 3

Total fixed cost when company employs its own force => $7990000

Contribution margin ratio when company employs its own force => 32%

Sales ($) => (Net operating profit +Total fixed cost) / contribution margin ratio

=> (-480000 + 7990000 ) 32%

Sales ($) => $ 23468750

Answer 4

Contribution margin ratio => 20% , 32%

Total fixed cost => $6380000 , $ 7990000

Sales20% - 6380000 = sales 32% - 7990000

-6380000 + 7990000 = sales 32 - sales 20

1610000= sales 12

sales => 1610000 /12%

sales => $ 13416667

Particulars 20% 22% Own force VARIABLE COST OF GOODS SOLD : Variable Expenses 17500000 17500000 17500000 Commission 6000000 6600000 3000000 TOTAL VARIABLE EXPENSES 23500000 24100000 20500000 FIXED EXPENSES Fixed Cost of goods sold 2730000 2730000 2730000 Fixed administrative expense 2900000 2900000 2900000 Fixed advertising expense 750000 750000 1250000 Payroll cost 690000 Travel and entertainment expenses - - 310000 Salaries of sales manager and support staff - - 110000 TOTAL FIXED EXPENSES 6380000 6380000 7990000

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