Choosing between compensation plans, operating leverage. (CMA, adapted) Marston Corporation manufactures pharmaceutical products that are sold through a network of sales agents. The agents are paid a commission of 18% of sales. The income statement for the year ending December 31, 2008, under two scenarios, is as follows:

REQUIRED 1. Calculate Marston Corporation’s 2008 contribution margin percentage, breakeven revenues, and degree of operating leverage under each of the two scenarios. (You will first have to recast the 2008 income statement assuming Marston had hired its own sales staff).
2. Describe the advantages and disadvantages of each type of sales alternative.
3. In 2009, Marston uses its own salespeople who demand a 15% commission. If all other cost behaviour patterns are unchanged, how much revenue must the salespeople generate in order to earn the same operating income as in 2008?LO1

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Marston Corporation Income Statement For the Year Ending December 31, 2008 Using Sales Agents Sales Cost of goods sold Variable Fixed $26,000,000 Using Own Sales Force $26,000,000 $11,700,000 $11,700,000 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 3,420,000 Fixed costs Operating income Marston is considering hiring its own sales staff to replace the network of agents. Marston will pay its salespeople a commission of 10% and incur additional fixed costs of $2,080,000. 8,100,000 $ 3,330,000 5,500,000 8,100,000 $ 3,330,000