=+4-45 KKK Choosing between compensation plans, operating leverage (CMA, adapted)

OBJECTIVES 1, 2, 4, 5 Marston Ltd manufactures pharmaceutical products that are sold through a network of external sales agents. The agents are paid a commission of 18% of revenues. Marston is considering replacing the sales agents with its own salespeople, who would be paid a commission of 10% of revenues and total salaries of $2080000. The income statement for the year ending 31 December 2014, under the two scenarios is shown here:

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9 10 11 12 13 A B C D E Revenues $26 000 000 $26 000 000 Cost of goods sold Variable $11 700 000 $11 700 000 Fixed 2 870 000 14 570 000 2 870 000 14 570 000 Gross margin 11 430 000 11 430 000 Marketing costs Commissions $ 4 680 000 $ 2 600 000 Fixed costs 3 420 000 8 100 000 5 500 000 8 100 000 Operating profit $ 3 330 000 $ 3 330 000 Marston Ltd Using sales agents Using own salespeople For the year ended 31 December 2014 Income statement Required 1 Calculate Marston’s 2014 contribution margin percentage, break-even revenues and degree of operating leverage under the two scenarios.