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% ofsales. The income statement for the year ending December 31, 2007, is as follows:

Marston Corporation Income Statement for the Year Ending December 31, 2007 Sales $31,200,000 Cost of goods sold Variable $14,040,000 Fixed 3,444,000 17,484,000 Gross margin 13,716,000 Selling and marketing expenses Commissions $ 5,616,000 Fixed costs 4,104,000 9,720,000 Operating income $ 3,996,000 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 fixed costs of $2,496,000.

Required 1. Calculate Marston Corporation’s breakeven point in sales dollars for the year 2007.

2. Calculate Marston Corporation’s breakeven point in sales dollars for the year 2007 if the company hires its own sales force in 2007 to replace the network of agents.

3. Calculate the degree of operating leverage at sales of $31,200,000 if

(a) Marston uses sales agents and

(b) Marston employs its own staff. Describe the advantages and disadvantages of each alternative.
4. IfMarston increases the commission paid to its sales staff to 15%, keeping all other costs the same, how much revenue (in dollars) would Marston have to generate to earn the same operating income it did in 2007?