| 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 | | | $ | 33,000,000 | | Cost of goods sold: | | | | | | Variable | $ | 17,300,000 | | | | Fixed | | 2,780,000 | | 20,080,000 | | | | | | | | Gross margin | | | | 12,920,000 | | Selling and administrative expenses: | | | | | | Commissions | | 6,270,000 | | | | Fixed advertising expense | | 790,000 | | | | Fixed administrative expense | | 3,300,000 | | 10,360,000 | | | | | | | | Net operating income | | | $ | 2,560,000 | | | | | | | | 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 $670,000, including fringe benefits. The salespeople will also be paid commissions of 10% of sales. Travel and entertainment expenses are expected to total about $370,000 for the year. The company will also have to hire a sales manager and support staff whose salaries and fringe benefits will come to $130,000 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 $470,000. | Required: | | PART1. | Assuming sales of $33,000,000, construct a budgeted contribution format income statement for the upcoming year for each of the following alternatives: | | PARTa. | The independent sales agents' commission rate remains unchanged at 19%. (Input all amounts as positive values except losses which should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Enter your answers in thousands. Round your percentage answers to the nearest whole percent.) | | | (Click to select)Net operating income (loss)Variable cost of goods soldFixed marketing staff expenseSalesFixed cost of goods soldContribution marginFixed administrative expenseFixed advertising expenseCommissions | $ | % | | | | | | Variable expenses: | | | | (Click to select)Fixed cost of goods soldFixed advertising expenseNet operating income (loss)Contribution marginCommissionsSalesVariable cost of goods soldFixed marketing staff expenseFixed administrative expense | $ | | | (Click to select)SalesVariable cost of goods soldContribution marginCommissionsFixed advertising expenseFixed cost of goods soldFixed marketing staff expenseFixed administrative expenseNet operating income (loss) | | | | | | | | Total variable expense | | % | | | | | | (Click to select)Fixed advertising expenseCommissionsFixed cost of goods soldFixed marketing staff expenseSalesNet operating income (loss)Contribution marginFixed administrative expensesVariable cost of goods sold | | % | | | | | | Fixed expenses: | | | | (Click to select)CommissionsNet operating income (loss)SalesContribution marginFixed cost of goods soldFixed marketing staff expenseVariable cost of goods soldFixed administrative expenseFixed advertising expense | | | | (Click to select)Fixed advertising expenseFixed marketing staff expenseSalesVariable cost of goods soldFixed administrative expenseContribution marginCommissionsFixed cost of goods soldNet operating income (loss) | | | | (Click to select)Fixed administrative expenseContribution marginNet operating income (loss)Fixed marketing staff expenseFixed cost of goods soldVariable cost of goods soldSalesCommissionsFixed advertising expense | | | | (Click to select)Net operating income (loss)SalesCommissionsContribution marginFixed marketing staff expenseFixed cost of goods soldFixed advertising expenseFixed administrative expenseVariable cost of goods sold | | | | | | | | Total fixed expenses | | | | | | | | (Click to select)Fixed cost of goods soldFixed marketing staff expenseNet operating income (loss)Fixed advertising expenseContribution marginVariable cost of goods soldFixed administrative expensesCommissionsSales | $ | | | | | | | Part b. The independent sales agents' commission rate increases to 21%. (Input all amounts as positive values except losses which should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Enter your answers in thousands. Round your percentage answers to the nearest whole percent.) | | | (Click to select)Fixed administrative expenseVariable cost of goods soldSalesCommissionsFixed cost of goods soldContribution marginFixed marketing staff expenseNet operating income (loss)Fixed advertising expense | $ | % | | | | | | Variable expenses: | | | | (Click to select)Fixed advertising expenseFixed administrative expenseCommissionsNet operating income (loss)Fixed cost of goods soldVariable cost of goods soldSalesFixed marketing staff expenseContribution margin | $ | | | (Click to select)SalesFixed marketing staff expenseFixed administrative expenseFixed advertising expenseCommissionsNet operating income (loss)Variable cost of goods soldContribution marginFixed cost of goods sold | | | | | | | | Total variable expense | | % | | | | | | (Click to select)Fixed advertising expenseVariable cost of goods soldContribution marginCommissionsSalesFixed cost of goods soldFixed administrative expensesFixed marketing staff expenseNet operating income (loss) | | % | | | | | | Fixed expenses: | | | | (Click to select)Fixed marketing staff expenseFixed administrative expenseSalesVariable cost of goods soldFixed advertising expenseContribution marginFixed cost of goods soldCommissionsNet operating income (loss) | | | | (Click to select)Contribution marginFixed advertising expenseFixed cost of goods soldNet operating income (loss)SalesVariable cost of goods soldFixed marketing staff expenseCommissionsFixed administrative expense | | | | (Click to select)Fixed advertising expenseSalesFixed cost of goods soldFixed marketing staff expenseNet operating income (loss)CommissionsContribution marginFixed administrative expenseVariable cost of goods sold | | | | (Click to select)Fixed administrative expenseFixed cost of goods soldNet operating income (loss)Fixed advertising expenseContribution marginSalesCommissionsVariable cost of goods soldFixed marketing staff expense | | | | | | | | Total fixed expenses | | | | | | | | (Click to select)Fixed cost of goods soldNet operating income (loss)CommissionsSalesVariable cost of goods soldFixed advertising expenseFixed administrative expensesContribution marginFixed marketing staff expense | $ | | | | | | | Part c. The company employs its own sales force. (Input all amounts as positive values except losses which should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Enter your answers in thousands. Round your percentage answers to the nearest whole percent.) | | | (Click to select)SalesNet operating income (loss)Fixed administrative expenseFixed cost of goods soldFixed marketing staff expenseFixed advertising expenseVariable cost of goods soldCommissionsContribution margin | $ | % | | | | | | Variable expenses: | | | | (Click to select)Fixed advertising expenseContribution marginFixed cost of goods soldSalesCommissionsFixed administrative expenseNet operating income (loss)Variable cost of goods soldFixed marketing staff expense | $ | | | (Click to select)SalesFixed marketing staff expenseFixed advertising expenseFixed administrative expenseCommissionsNet operating income (loss)Variable cost of goods soldFixed cost of goods soldContribution margin | | | | | | | | Total variable expense | | % | | | | | | (Click to select)Variable cost of goods soldFixed administrative expensesCommissionsFixed advertising expenseNet operating income (loss)Contribution marginSalesFixed marketing staff expenseFixed cost of goods sold | | % | | | | | | Fixed expenses: | | | | (Click to select)Fixed cost of goods soldContribution marginSalesNet operating income (loss)Fixed marketing staff expenseFixed advertising expenseFixed administrative expenseVariable cost of goods soldCommissions | | | | (Click to select)SalesVariable cost of goods soldContribution marginFixed cost of goods soldFixed marketing staff expenseFixed administrative expenseCommissionsFixed advertising expenseNet operating income (loss) | | | | (Click to select)Fixed cost of goods soldCommissionsFixed administrative expenseNet operating income (loss)Variable cost of goods soldFixed advertising expenseSalesFixed marketing staff expenseContribution margin | | | | (Click to select)Fixed administrative expenseFixed advertising expenseNet operating income (loss)SalesContribution marginFixed marketing staff expenseVariable cost of goods soldFixed cost of goods soldCommissions | | | | | | | | Total fixed expenses | | | | | | | | (Click to select)Variable cost of goods soldSalesFixed cost of goods soldNet operating income (loss)Fixed advertising expenseFixed marketing staff expenseCommissionsFixed administrative expensesContribution margin | $ | | | | | | | | Part2. | Calculate Marston Corporation's break-even point in sales dollars for the upcoming year assuming the following: | | Part2a. | The independent sales agents' commission rate remains unchanged at 19%. (Round the CM ratio to 2 decimal places and final answer to the nearest dollar amount. Enter your answers in whole dollars and not in thousands.) | Break-even point in sales dollars | $ | | Part2b. | The independent sales agents' commission rate increases to 21%. (Round the CM ratio to 2 decimal places and final answer to the nearest dollar amount. Enter your answers in whole dollars and not in thousands.) | | Break-even point in sales dollars | $ | | Part2c. | The company employs its own sales force. (Round the CM ratio to 2 decimal places and final answer to the nearest dollar amount. Enter your answers in whole dollars and not in thousands.) | | Break-even point in sales dollars | $ | | Part3d. | 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 $33,000,000 and the company continues to sell through agents (at a 21% commission rate)? (Round the CM ratio to 2 decimal places and final answer to the nearest dollar amount. Enter your answers in whole dollars and not in thousands.) | | Part4. | 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 and final answer to the nearest dollar amount. Enter your answers in whole dollars and not in thousands.) | | | | | | | | |
