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ACC 350 2-20-19 Marston Corporation manufactures pharmaceutical products sold through a network of sales agents in the United States and Canada. The agents are currently

ACC 350 2-20-19 Marston Corporation manufactures pharmaceutical products sold through a network of sales agents in the United States and Canada. The agents are currently paid an 18% commission on 10 Points sales; that percentage was used when Marston prepared the following budgeted income statement for the fiscal year ending June 30, 2015. MARSTON CORPORATION Budgeted Income Statement For the Year Ending June 30, 2015 ($000 omitted) Sales Cost of goods sold Variable Fixed Gross profit $26,000 $11,700 2,870 14,570 $11,430 Selling and administrative costs Commissions $4,680 Fixed advertising cost 750 Fixed administrative cost 1,850 7,280 Income before interest and taxes $4,150 Fixed interest cost 650 Income before income taxes $3,500 Income taxes (30%) Net income 1,050 $2,450 Since the completion of the income statement, Marston has learned that its sales agents are requiring a 5% increase in their commission rate (to 23%) for the upcoming year. As a result, Marston's president has decided to investigate the possibility of hiring its own sales staff in place of the network of sales agents and has asked Tom Markowitz, Marston's controller, to gather information on the costs associated with this change. Tom estimates that Marston must hire eight salespeople to cover the current market area, at an average annual payroll cost for each employee of $80,000, including fringe benefits expense. Travel and entertainment expense is expected to total $600,000 for the year, and the annual cost of hiring a sales manager and sales secretary will be $150,000. In addition to their salaries, the eight salespeople will each earn commissions at the rate of 10% of sales. The president believes that Marston also should increase its advertising budget by $500,000 if the eight salespeople are hired. Required 1. Determine Marston Corporation's breakeven point in sales dollars for the fiscal year ending June 30, 2015, if the company hires its own sales force and increases its advertising costs. Prove this by constructing a contribution-format income statement. 2. If Marston continues to sell through its network of sales agents but agrees to pay the higher (23%) commission rate, determine the estimated volume in sales dollars that would be required to generate the same net income before tax as projected in the budgeted income statement. ...3. Bonus: What is the indifference point in sales for the firm to either accept the agents' demand or adopt the proposed change? Which plan is better for the firm? Why

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