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 18% 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			$	30,000,000
Cost of goods sold:
Variable	$	17,400,000
Fixed		2,800,000		20,200,000
Gross margin				9,800,000
Selling and administrative expenses:
Commissions		5,400,000
Fixed advertising expense		800,000
Fixed administrative expense		3,200,000		9,400,000
Net operating income			$	400,000

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 20% 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 $700,000, including fringe benefits. The salespeople will also be paid commissions of 10% of sales. Travel and entertainment expenses are expected to total about $400,000 for the year. The company will also have to hire a sales manager and support staff whose salaries and fringe benefits will come to $200,000 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 $500,000.

Required

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 $30,000,000 and the company continues to sell through agents (at a 20% commission rate)?

4-Determine the volume of sales at which net operating income would be equal regardless of whether Marston Corporation sells through agents (at a 20% commission rate) or employs its own sales force.

5-Prepare a graph on which you plot the profits for both of the following alternatives

a-The independent sales agents' commission rate increase to 20%

b-The company employs its own sales force

on the graph use total sales revenue as the measure of activity

6- Write a memo to the president of Marston Corporation in which you make a recommendation as to whether the company should continue to use independent sales agents at a 20% commission rate or employ its own sales force. fully explain the reasons for our recommendation in the memo.

1b
Sales		$ 30,000,000.00
Variable Cost
Cost of Goods Sold	$ 17,400,000.00
Sales agents commission 30,000,000 X .20	$ 6,000,000.00	$ 23,400,000.00
Contribution Margin		$ 6,600,000.00
Less Fixed cost
Cost of Goods Sold	$ 2,800,000.00
Advertising Expense	$ 800,000.00
Admirative Expense	$ 3,200,000.00	$ 6,800,000.00
Net Income		$ (200,000.00)