Reference no: EM132254611
Question - 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% commissions on sales; that percentage was used when Marston prepared the following budgeted income statement for the fiscal year ending June 30, 2015.
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MARSTON CORPORATION Budgeted Income Statement For the year Ending June 30, 2015 ($000 omitted)
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Sales
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$26,000
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Cost of goods sold
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$11,700
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Variable
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2,870
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14,570
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Fixed
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$11,430
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Gross profit
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Selling and administrative costs
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Commissions
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$4,680
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Fixed advertising cost
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750
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Fixed administrative cost
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1,850
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7,280
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Income before interest and taxes
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$4,150
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Fixed interest cost
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650
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Income before income taxes
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$3,500
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Income taxes (30%)
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1,050
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Net income
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$2,450
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Since the completion of the income statement, Marston has learned that its sales agents are requiring a 5% increase in their commission rate (to 23%) 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% of sales. 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, 2015, if the company hires its own sales force and increases its advertising costs. Prove this by constructing a contribution-format income statement.
2. If Marston continues to sell through its network of sales agents but agrees to pay the higher (23%) commission rate, determine the estimated volume in sales dollars that would be required to generate the same net income before tax as projected in the budgeted income statement.
3. 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? Why?
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