Marston Corporation manufactures disposable thermometers that are sold to hospitals through a network of independent sales agents located in

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 16% 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
Sales $ 31,000,000
Cost of goods sold:
Variable $ 17,500,000
Fixed 2,760,000 20,260,000
Gross margin 10,740,000
Selling and administrative expenses:
Commissions 4,960,000
Fixed advertising expense 770,000
Fixed administrative expense 2,600,000 8,330,000
Net operating income $ 2,410,000

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 18% 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 $630,000, including fringe benefits. The salespeople will also be paid commissions of 10% of sales. Travel and entertainment expenses are expected to total about $360,000 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 $490,000.

Required:
1. Assuming sales of $31,000,000, construct a budgeted contribution format income statement for the upcoming year for each of the following alternatives (Enter your answers in thousands of dollars (i.e., 15,000,000 should be entered as 15,000.)):

a.
The independent sales agents’ commission rate remains unchanged at 16%.

b.
The independent sales agents’ commission rate increases to 18%.

c.
The company employs its own sales force.

2. Calculate Marston Corporation’s break-even point in sales dollars for the upcoming year assuming the following: (Round the CM ratio to 2 decimal places. Enter your answers in whole dollars and not in thousands.)

a. The independent sales agents’ commission rate remains unchanged at 16%.

b.
The independent sales agents’ commission rate increases to 18%.

c.
The company employs its own sales force.

3.
Refer to your answer to (1)(b) above. If the company employs its own sales force, what volume of sales would be necessary to generate the net operating income the company would realize if sales are $31,000,000 and the company continues to sell through agents (at a 18% commission rate)? (Round the CM ratio to 2 decimal places. Enter your answers in whole dollars and not in thousands.)

4.
Determine the volume of sales at which net operating income would be equal regardless of whether Marston Corporation sells through agents (at a 18% commission rate) or employs its own sales force. (Round the CM ratio to 2 decimal places. Enter your answers in whole dollars and not in thousands.)

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Emery 4 weeks 2021-12-26T09:08:30+00:00 1 Answer 0 views 0

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    2021-12-26T09:10:07+00:00

    Answer:

    Step-by-step explanation:

    Solution:

    1.

    Budgeted Income Statement

    Commission Remains 16 %  

    Sales                   31,000

    Less: Variable Expenses                   17,500

    Less: Commissions                     4,960

    Contribution                     8,540

    Less: Fixed Expenses  

    Cost of Goods Sold                     2,760

    Fixed Administrative Expenses                     2,600

    Fixed Advertisement Expenses                         770

    Total Fixed Expenses                     6,130

    Gross Profit                     2,410

    Budgeted Income Statement

    Commission changed to 18 %  

    Sales                       31,000

    Less: Variable Expenses                       17,500

    Less: Commissions                          5,580

    Contribution                          7,920

    Less: Fixed Expenses  

    Cost of Goods Sold                          2,760

    Fixed Administrative Expenses                          2,600

    Fixed Advertisement Expenses                             770

    Total Fixed Expenses                          6,130

    Gross Profit                          1,790

    Budgeted Income Statement

    Hire Staff  

    Sales 31000

    Less: Variable Expenses                  17,500

    Less: Commissions                     3,100

    Contribution                  10,400

    Fixed Expenses  

    Salaries of Sales Persons                        630

    Entertainment Expenses                        360

    Support Staff Salary                        190

    Fixed Advertisement Expenses                        491

    Fixed Administrative Expenses                     2,600

    Total Fixed Expenses                     4,271

    Gross Profit                     6,129

    2.

    a. Break -even in Dollars = Fixed Cost / Contribution Margin Ratio                   22,252

    Total Fixed Expenses                     6,130

    Contribution Ratio = (Contribution/ sales) * 100 27.55%

    b. Break -even in Dollars = Fixed Cost / Contribution Margin Ratio                       23,994

    Total Fixed Expenses                          6,130

    Contribution Ratio = (Contribution/ sales) * 100 25.55%

    c. Break -even in Dollars = Fixed Cost / Contribution Margin Ratio                  12,730

    Total Fixed Expenses                     4,271

    Contribution Ratio = (Contribution/ sales) * 100 33.548%Comment  

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