10.

value: 1.00 points

Case 3-32 Cost Structure; Break-Even Point; Target Profits [LO3-4, LO3-5, LO3-6]

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 19% commission on sales, and this commission rate was used when Marston's management prepared the following budgeted absorption income statement for the upcoming year.

Marston Corporation Budgeted Income Statement
Sales			$	38,000,000
Cost of goods sold:
Variable	$	17,500,000
Fixed		2,730,000		20,230,000
Gross margin				17,770,000
Selling and administrative expenses:
Commissions		7,220,000
Fixed advertising expense		760,000
Fixed administrative expense		2,900,000		10,880,000
Net operating income			$	6,890,000

Since the completion of the above statement, Marstons management has learned that the independent sales agents are demanding an increase in the commission rate to 21% 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, Marstons 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 $620,000, including fringe benefits. The salespeople will also be paid commissions of 10% of sales. Travel and entertainment expenses are expected to total about $340,000 for the year. The company will also have to hire a sales manager and support staff whose salaries and fringe benefits will come to $180,000 per year. To make up for the promotions that the independent sales agents had been running on behalf of Marston, management believes that the companys budget for fixed advertising expenses should be increased by $480,000.

Required:
1.	Assuming sales of $38,000,000, 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 19%.

b.	The independent sales agents' commission rate increases to 21%.

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 19%.

b.	The independent sales agents' commission rate increases to 21%.

c.	The company employs its own sales force.

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 $38,000,000 and the company continues to sell through agents (at a 21% commission rate)? (Round the CM ratio to 2 decimal places. Enter your answers in whole dollars and not in thousands.)

4.	Determine the volume of sales at which net operating income would be equal regardless of whether Marston Corporation sells through agents (at a 21% 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.)

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