Martin corporation manufactures pharaceutical products that are sold through a n

Question

Martin corporation manufactures pharaceutical products that are sold through a network of external sales agents. the agents are paid a commission of 20% of revenues. Martin is considering replacing the sales agents with its own salespeople, who would be paid a commission of 10% of revenues and total salaries of $ 2,800,000. the income statement for the year ending December 31, 2013, under the two scenarios is shown here 1. Calculate Martin's 2013 contribution margin percentage, break even revenues, and degree of operating leverage under the two scenarios. 2. Describe the advantages and disadvantages of each type of sales alternative. 3. In 2014, martin 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 20133. In 2014, Martin 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 2013?

Explanation / Answer

Req. 1)

CONTRIBUTION MARGIN % :

= (Sales - Variable Expenses) / Sales = Contribution Margin

With Sales Agents = (28000000 - 17640000) / 28000000 = 0.37 or 37%

With own Sales Force =  (28000000 - 14840000) / 28000000 = 0.47 or 47%

BREAK EVEN POINT:

= Fixed Expenses / Contribution Margin % = Break Even Point Sales in Dollars

With Sales Agents = $6475000 / 0.37 = $17,500,000

With own Sales Force = $9275000 / 0.47 = $19,734,043

DEGREE OF OPERATING LEVERAGE:

= Contribution / Operating Income = Operating Leverage

With Sales Agents = 10360000 / 3885000 = 2.67

With own Sales Force = 13160000 / 3885000 = 3.38

Req. 2)

With Sales Agents = Advantage : No personal attention and fixed commission paid to agents of sales.

Disadvantage : Low profit margin and no control . Hard to predict the sales.

With own Sales Force = Advantage : Higher net income as fixed commission/salary paid to sales force. More predictable sales figures.

Disadvantage : High Personnal attention on the Sales force. Extra expenses to control and get the sales enhenced.

Req. 3) Sales in 2014 that will accomodate the 15% commission to sales force and all other constant expenses with maintaining the 2013 Net income = Variable expenses (4200000 +12040000) + Fixed Expenses (6425000 +2850000) + Net Income of 2013 $3885000 = $29,400,000

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