CVP Analysis, Commissions, Ethics Marston Corporation manufactures pharmaceutical products...

CVP Analysis, Commissions, Ethics Marston Corporation manufactures pharmaceutical products sold through a network of sales agents in the United States and Canada. The agents are currently paid an 18 percent commission on sales; that percentage was used when Marston prepared the following budgeted income statement for the fiscal year ending June 30, 2010.

Since the completion of the income statement, Marston has learned that its sales agents are requiring a 5 percent increase in their commission rate (to 23 percent) for the upcoming year. As a result, Marston’s president has decided to investigate the possibility of hiring its own sales staff in place of the network of sales agents and has asked Tom Markowitz, Marston’s controller, to gather information on the costs associated with this change.

Tom estimates that Marston must hire eight salespeople to cover the current market area, at an average annual payroll cost for each employee of $80,000, including fringe benefits expense. Travel and entertainment expense is expected to total $600,000 for the year, and the annual cost of hiring a sales manager and sales secretary will be $150,000. In addition to their salaries, the eight salespeople will each earn commissions at the rate of 10 percent. The president believes that Marston also should increase its advertising budget by $500,000 if the eight salespeople are hired..

Required

1. Determine Marston Corporation’s breakeven point in sales dollars for the fiscal year ending June 30, 2010, if the company hires its own sales force and increases its advertising costs.

2. If Marston continues to sell through its network of sales agents and pays the higher commission rate, determine the estimated volume in sales dollars that would be required to generate the same operating profit as projected in the budgeted income statement.

3. Describe the general assumptions underlying breakeven analysis that limit its usefulness.

4. What is the indifference point in sales for the firm to either accept the agents’ demand or adopt the pro­posed change? Which plan is better for the firm?

5. What are the ethical issues, if any, that Tom should consider?

(CMA Adapted)