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 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 $ 39,000,000 Sales Cost of goods sold Variable $ 17,100,000 2,720,000 9,820,000 Fixed 19,180,000 Gross margin Selling and administrative expenses Commissions 7,020,000 720,000 3,200,000 10,940,000 Fixed advertising expense Fixed administrative expense $ 8,240,000 Net operating income 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 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, 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 $640,000, including fringe benefits. The salespeople will also be paid commissions of 10% of sales. Travel and entertainment expenses are expected to total about $340,000 for the year. The company will also have to hire a sales manager and support staff whose salaries and fringe benefits will come to $190,000 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 $440,000

Answer 1

1
a

Marston Corporation
Budgeted Income Statement
Sales		$ 3,90,00,000	100%
Cost of Goods Sold
Variable	$ 1,71,00,000
Fixed	$      27,20,000
Commission	$      70,20,000	$ 2,68,40,000	69%
Contribution		$ 1,21,60,000	31%
Fixed Costs
Advertising Expense		$        7,20,000
Admin Expense		$      32,00,000
Net Income		$      82,40,000

b

Marston Corporation
Budgeted Income Statement
Sales		$ 3,90,00,000	100%
Cost of Goods Sold
Variable	$ 1,71,00,000
Fixed	$      27,20,000
Commission	$      78,00,000	$ 2,76,20,000	71%
Contribution		$ 1,13,80,000	29%
Fixed Costs
Advertising Expense		$        7,20,000
Admin Expense		$      32,00,000
Net Income		$      74,60,000

c

Marston Corporation
Budgeted Income Statement
Sales		$ 3,90,00,000	100%
Cost of Goods Sold
Variable	$ 1,71,00,000
Fixed	$      27,20,000
Commission	$      39,00,000	$ 2,37,20,000	61%
Contribution		$ 1,52,80,000	39%
Fixed Costs
Sales people Salaries		$        6,40,000
Travel and Entertainment		$        3,40,000
Sales Manager		$        1,90,000
Advertising Expense		$      11,60,000
Admin Expense		$      32,00,000
Net Income		$      97,50,000

2.

a. Breakeven in sales dollar = Fixed Costs / Contribution Margin
= 3,920,000 / 31% = $12,572,368.42

b. Breakeven in sales dollar = Fixed Costs / Contribution Margin
                                             = 3,920,000 / 29% = $13,434,094.90

c. Breakeven in sales dollar = Fixed Costs / Contribution Margin
                                             = 5,530,000 / 39% = $14,114,528.80

3.

Volume of sales necessary = (Fixed Cost + Desired Profit) / Contribution Margin
= (5,530,000 + 7,460,000) / 39%
= $33,307,692

4.

29% of sales - 3,920,000 = 39% of sales - 5,530,000
10% of sales = 5,530,000 - 3,920,000
Sales = $16,100,000