Question

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 20% 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 $ 37,000,000 Sales Cost of goods sold: Variable Fixed $ 17,200,000 2,710,000 19,910,000 17,090,000 Gross margin Selling and administrative expenses: Commissions Fixed advertising expense Fixed administrative expense 7,400,000 750,000 2,600,000 10,750,000 Net operating income $ 6,340,000 Since the completion of the above statement, Marston's management has learned that the independent sales agents are demanding an increase in the commission rate to 22% 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, Marston's 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 $660,000, including fringe benefits. The salespeople will also be paid commissions of 10% of sales. Travel and entertainment expenses are expected to total about $390,000 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 company's budget for fixed advertising expenses should be increased by $480,000.

Answer 1

1.

a.	Marston Corporation
	Contribution Format Income Statement
	($ in 1000s)
	Sales	37000	100%
	Variable expenses:
	Variable cost of goods sold	17200
	Commissions	7400
	Total variable expense	24600	66%
	Contribution margin	12400	34%
	Fixed expenses:
	Fixed cost of goods sold	2710
	Fixed advertising expense	750
	Fixed administrative expense	2600
	Fixed marketing staff expense	0
	Total fixed expenses	6060
	Net operating income	6340
b.	Marston Corporation
	Contribution Format Income Statement
	($ in 1000s)
	Sales	37000	100%
	Variable expenses:
	Variable cost of goods sold	17200
	Commissions (22% x $37000)	8140
	Total variable expense	25340	68%
	Contribution margin	11660	32%
	Fixed expenses:
	Fixed cost of goods sold	2710
	Fixed advertising expense	750
	Fixed administrative expense	2600
	Fixed marketing staff expense	0
	Total fixed expenses	6060
	Net operating income	5600
c.	Marston Corporation
	Contribution Format Income Statement
	($ in 1000s)
	Sales	37000	100%
	Variable expenses:
	Variable cost of goods sold	17200
	Commissions (10% x $37000)	3700
	Total variable expense	20900	56%
	Contribution margin	16100	44%
	Fixed expenses:
	Fixed cost of goods sold	2710
	Fixed advertising expense ($750 + $480)	1230
	Fixed administrative expense	2600
	Fixed marketing staff expense ($660 + $390 + $130)	1180
	Total fixed expenses	7720
	Net operating income	8380

2a. Break-even point in sales dollars = Total fixed expenses/Contribution margin ratio = $6060000/33.51% = $18,084,154

Contribution margin ratio = $12400000/$37000000 = 33.51%

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