Case 5-32_Megan_10_22.docxVIP

Marston Corporation Case 5-32 Cost Structure; Break-Even Point; Target Profits Joseph Baker Olim Atabayev Megan Fan Marston CorporationCost Structure; Break-Even Point; Target ProfitsJoseph Baker/Olim Atabayev/ Megan Fan 1. Assuming sales of $ 30,000,000, construct a budgeted contribution format income statement for the upcoming year for each of the following alternatives:a) The independent sales agents commission rate remains unchanged at 18%.b) The independent sales agents commission rate increase to 20%c) The company employs its own sales force.The figures below represent the process for the traditional and new approaches: 18% Commissions 20% Commissions Own sales force Sales $ 30,000,000 $ 30,000,000 $ 30,000,000Variable expenses Variable cost of goods sold 17,400,000 17,400,000 17,400,000 Commissions 5,400,000 6,000,000 (1) 3,000,000 Total variable expense 22,800,000 23,400,000 20,400,000Contribution margin 7,200,000 6,600,000 9,600,000Fixed expenses Fixed cost of goods sold 2,800,000 2,800,000 2,800,000Fixed advertising expense 800,000 800,000 1,300,000(2) Fixed sales staff expense 1,300,000(3)Fixed administrative expense 3,200,000 3,200,000 3,200,000Total fixed expenses 6,800,000 6,800,000 8,600,000Net operating income 400,000 200,000 1,000,000(1) $ 30,000,000*20%=$ 6,000,000(2) $ 800,000+ $ 500,000= $1,300,000(3) $ 700,000+ $ 400,000+$ 200,000= $ 1,300,0002. Calculate Marston Corporations break-even point in sales dollars for the upcoming year assuming the following:a) The independent sales agents commission rate remains unchanged at 18%.b) The independent sales agents commission rate increase to 20%c) The company employs its own sales force.The figures and format below represent the process for the traditional and new approaches:Break-Even point sales=Fixed expenses/Contribution margin ratioContribution margin ratio=Contribution margin/salesa) Contribution margin ratio=$7,200,000/$ 30,000,000=0.24 Break-Even point sales=$ 6,800,000/0.24=$ 28,333,333b) Contribution margin ratio=$ 6,600,000/$30,000,000=0.22Break-Even point=$6,800,000/0.22=$ 30,909,091c) Contribution margin ratio=$9,600,000/$30,000,000=0.32Break-Even point sales=$8,600,000/0.32=$ 26,875,0003. 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 $ 30,000,000 and the company continues to sell through agents (at a 20% commission rate)?Sales for target profit=(Fixed expenses + Target profit)/Contribution margin ratio(4) =($8,600,000-$200,000)/0.32 =$26,250,000(4) CM ratio is the ratio when the company employs its own sales forces.4. Determine the volume of sales at which net operating income would be equal regardless of whether Marston Corporation sells through agents (at a 20% commission rate) or employs its own sales force.Set up sales at which net operating income would be equal=XNet operating income through agents (at a 20% commission rate)=Contribution Margin-Fixed expenses4. Continued: =0.22(5) X-$ 6,800,000Net operating income through own sales force=0.32(6) X-$8,600,0000.22X-$ 6,800,000=0.32X-$8,600,000$1,800,000=0.1X X=$18,000,000Therefore, at the sales of $ 18,000,000, the company can generate the same net operating income regardless of whether it sells through agents or its own sales forces.(5) Contribution margin ratio when the company sells through agents (at a 20% commission rate)(6) Contribution margin ratio when the company sells through its own sales forces.5. Prepare a graph on which you plot the profits for both of the following alternatives.a) The independent sales agents commission rate increase to 20%b) The company employs its own sales force.On the graph, use total sales revenue as the measure of activity. Graph 1 6. Write a memo to the president of Marston Corporation in which you make a recommendation as to whether the company should continue to use independent sales agents (at a 20% commission rate) or employs its own sales force. Fully explain the reasons for your recommendation in the memo.MemoTo: President of Marston CorporationFrom: Joseph Baker; Olim Atabayev; Megan FanDate: Oct 25, 2011Basing on the data provided above, we recommend that the company can hire our own sales force. First of all, when the sales is higher than $18,000,000, the net operating income will be higher when the company use its own sales force than that when it uses sales agents (Graph 1). Secondly, this is the third increase in commission demanded by the independent sales agents in five years. If the company has its own sales forces, the company can get rid of the control from the sales agents. However, there are still some aspects we need to pay attention to. Firstly, when the sales is lower than $18,000,000, the net operating income with the companys own sales force will be lower than the net operating income with the sale agents. So we need to keep the sales more than the level of $18,000,000. Secondly, if the company hire its own sales force, the company will spend time and expenses to give them training. And they also need time to establish solid relationship with the customers. The hospitals may not trust these new salesperson and this situation may cause the loss of sales. In addition, at the sales level of $30,000,000, the fixed cost including the increased advertising expenses an