Morocco Corporation manufactures disposable thermometers that are sold to hospitals through anetwork of independent sales agents located in the United States and Canada. These agents sell avariety of products to hospitals in addition to Moroccos disposable thermometer. The sales agentsare currently paid an 18% commission on sales, and this commission rate was used whenMoroccos management prepared the following budgeted income statement for the coming year.Morocco CorporationBudgeted Income StatementSales..................................... $30,000,000Cost of Goods Sold:Variable......................... $17,800,000Fixed............................ 2,400,000 20,200,000Gross Margin........................... 9,800,000Selling and Admin. Expenses:Commissions................... 5,400,000Fixed Advertising Exp....... 800,000Fixed Admin. Exp............ 3,200,000 9,400,000Net Operating Income................. $ 400,000Since completion of the above statement, Moroccos management has learned that the independentsales agents are demanding an increase in the commission rate to 20% of sales for the upcomingyear. This would be the third increase in commissions demanded by the independent sales agents infive years. As a result, Moroccos management has decided to investigate the possibility of hiringits own sales staff to replace the independent sales agents.Moroccos controller estimates that the company will have to hire eight salespeople to cover thecurrent 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. Traveland entertainment expenses are expected to total about $300,000 for the year. The company willalso have to hire a sales manager and support staff whose salaries and fringe benefits will come toabout $200,000 per year. To make up for the promotions that the independent sales agents had beenrunning on behalf of Morocco, management believes that the companys budget for fixedadvertising expenses should be increased by $500,000.

Required:1. (4 points) Assuming sales of $30,000,000, construct a budgeted contribution margin formatincome statement for the upcoming year with the following alternatives:a. The independent sales agents commission rate stays the same at 18%.b. The independent sales agents commission rate increases to 20%.c. The company employs its own sales force.2. (2 points) Calculate Moroccos break-even point in sales dollars next year for each of thesealternatives:a. The independent sales agents commission rate stays the same at 18%.b. The independent sales agents commission rate increases to 20%.c. The company employs its own sales force.(continued on next page)

3. (2 points) Refer to your answer in (1)(b) above. If the company employs its own salesforce, what volume of sales would be necessary to generate the same net operating incomethe company would generate in (1)(b) above?4. (2points) Determine the volume of sales at which net operating income would be equalregardless of whether Morocco Corporation sells through agents (at a 20% commission rate)or employs its own sales force.