arston Corporation manufactures disposable thermometers that are sold to hospita

Question

arston Corporation manufactures disposable thermometers that are sold to hospitals through a network of independent sales agents located in the US 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 Martston's management prepared the following budgeted absorption income statement for the upcoming year. Since the completion of the below statement, marston's management has learned that the independent sales agents are demanding an increase in commissions rate to 20% of sales for the upcoming year. This would be the third increase in commissions demanded by the independent sales agents in 5 years. As a result, Marston's mgmt has decided to investigate the possibility of hiring it's own sales staff to replace the independent sales agents. Martston's controller estimates that the company will have to hire 8 sales people to cover the current market area, and the total annual payroll costs of these employees will be about $700,000, including fringe benefits. The sales people will also be paid commissions of 10% of sales. Travel and entertainment expenses are expected to total about $400,000 for the year. The company will also have to hire a sales manager and support staff whose salaries and fringe benefits will come to $200,000 per year. To make up for the promotions that the independent sales agents had been running on behalf of Marston, mgmt believes that the companies budget for fixed advertising expenses should be increased by $500,000. Marston Corp Budgeted Income Statement Sales...........................................................$30,000,000 COGS Variable..................$17,400,000 Fixed........................ 2,800,000 20,200,000 Gross Margin............................................... 9,800,000 Selling & Admin expense Commissions 5,400,000 Fixed Adver Exp 800,000 Fixed Admin exp 3,200,000 9,400,000 NOI....................................................................$400,000 Required: . 3. Refer to your answer to (1) (b) above. If the company employs it's own sales force, what volume of sales would be necessary to generate the NOI the company would realize if sales are $30,000,000 and the company continues to sale through agents (at a 20% commission rate)? 4. Determine the volume of sales at which NOI would be equal regardless of whether Marston corp sales through agents (at a 20% commission rate) or employs it's own sales force.

Explanation / Answer

1.      Assuming sales of $30,000,000, construct a budgeted contribution format income statement for the upcoming year for each of the following alternatives:
Alternatives The independent sales agents

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