1. The annual planning process at Century Office Systems, Inc. had been arduous but

produced a number of important marketing initiatives for the next year. Most

notably, company executives had decided to restructure its product-marketing team

into two separate groups: (1) Corporate Office Systems and (2) Home Office

Systems. Angela Blake was assigned responsibility for the Home Office Systems

group, which would market the company's word-processing hardware and software

for home and office-at-home use by individuals. Her marketing plan, which included

a sales forecast for next year of $25 million, was the result of a detailed market

analysis and negotiations with individuals both inside and outside the company.

Discussions with the sales director indicated that 50 percent of the company sales

force would be dedicated to selling products of the Home Office Systems group.

Sales representatives would receive a 10 percent commission on sales of home office

systems. Under the new organizational structure, the Home Office Systems group

would be charged with 40 percent of the budgeted sales force expenditure. The sales

director's budget for salaries and fringe benefits of the sales force and noncommission

selling costs for both the Corporate and Home Office Systems groups was $6 million.

The advertising and promotion budget contained three elements: trade magazine

advertising, cooperative newspaper advertising with Century Office Systems, Inc.

dealers, and sales promotion materials including product brochures, technical

manuals, catalogs, and point-of-purchase displays. Trade magazine ads and sales

promotion materials were to be developed by the company's advertising and public

relations agency. Production and media placement costs were budgeted at $200,000.

Cooperative advertising copy for both newspaper and radio use had budgeted

production costs of $125,000. Century Office Systems, Inc. 's cooperative advertising

allowance policy stated that the company would allocate 5 percent of company sales

to dealers to promote its office systems. Dealers always used their complete

cooperative advertising allowances.

Meetings with manufacturing and operations personnel indicated that the direct

costs of material and labor and direct factory overhead to produce the Home Office

System product line represented 40 percent of sales. The accounting department

would assign $350,000 in indirect manufacturing overhead (for example,

depreciation, maintenance) to the product line and $200,000 for administrative

overhead (clerical, telephone, office space, and so forth). Freight for the product line

would average 10 percent of sales.

Blake's staff consisted of two product managers and a marketing assistant. Salaries

and fringe benefits for Ms. Blake and her staff were $200,000 per year.

1. Prepare a pro forma income statement for the Home Office Systems

group given the information provided.

2. Prepare a pro forma income statement for the Home Office Systems

group given annual sales of only $20 million.

3. At what level of dollar sales will the Home Office Systems group break

even?