Q1.

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%. Commission Rates Sales Cost of Goods Sold: Variable Expenses Commissions Contribution Margin Fixed Expenses: Cost of Goods Sold Travel & Entertainment Expense Sales Manager & Support Staff Annual Payroll Cost Fixed advertising expense Fixed administrative expense Net Operating Income b. The independent sales agents' commission rate increases to 20% Commission Rates Sales Cost of Goods Sold: Variable Expenses Commissions Contribution Margin Fixed Expenses: Cost of Goods Sold Travel & Entertainment Expense Sales Manager & Support Staff Annual Payroll Cost Fixed advertising expense Fixed administrative expense Net Operating Income 2,800,000 0 0 0 800,000 3,200,000 6,800,000 (200,000) 17,400,000 6,000,000 23,400,000 6,600,000 78% 22% 20% 30,000,000 Ratio 100% 2,800,000 0 0 0 800,000 3,200,000 6,800,000 400,000 17,400,000 5,400,000 22,800,000 7,200,000 76% 24% 18% 30,000,000 Ratio 100%

c. The company employs its own sales force Commission Rates Sales Cost of Goods Sold: Variable Expenses Commissions Contribution Margin Fixed Expenses: Cost of Goods Sold Travel & Entertainment Expense Sales Manager & Support Staff Annual Payroll Cost Fixed advertising expense Fixed administrative expense Net Operating Income 2,800,000 400,000 200,000 700,000 1,300,000 3,200,000 8,600,000 1,000,000 17,400,000 3,000,000 20,400,000 9,600,000 68% 2632%

10%
30,000,000

Ratio 100%

Q2. Calculate Marston Corporation's 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 increases to 20%. c. The company employs its own sales force. Break even sales dollars for three alternatives is given by the formula Total fixed expenses / contribution margin ratio of sales For independent sales agents' commission rate at 18%. Breakeven = 6,800,000 / 0.24 = $ 28,333,333 For independent sales agents' commission rate at 20%. Breakeven = 6,800,000 / 0.22 = $ 30,909,091 Company employs its own sales force @10% commission Breakeven = 8,600,000 / 0.32 = $ 26,875,000

Q3. Refer to your answer to (1b) 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)? 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) = [(200,000) + 8,600,000]/ 0.32 = $ 26,250,000

Q4. 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. Say the net income = X X* 22% - 6,800,000 = X* 32% - 8,600,000 Solving the equation for X We get 18,000,000 Therefore, 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 is 18,000,000. Own sales force @ 10% 18,000,000 12,240,000 5,760,000 8,600,000 $ (2,840,000) 18,000,000 20% Commission 18,000,000 14,040,000 3,960,000 6,800,000 $ (2,840,000)

Sales Total variable expense Contribution margin Total fixed expenses Net operating income

100% 68% 32%

Sales Total variable expense Contribution margin Total fixed expenses Net operating income

100% 78% 22%

Q5. Prepare a graph on which you plot the profits for both of the following alternatives. a. The independent sales agents' commission rate increases to 20%. b. The company employs its own sales force. On the graph, use total sales revenue as the measure of activity.

20,000,000

15,000,000

10,000,000

5,000,000

0 15,000,000 -5,000,000 20,000,000 25,000,000 30,000,000 35,000,000 40,000,000 45,000,000

-10,000,000

-15,000,000 Profits for commission @ 20% Profits for commission @ 10%

Q6. 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 employ its own sales force. Fully explain the reasons for your recommendation in the memo.

To: From:

President of Marston Corporation XYZ

On the presumption that a new sales force can be hired quickly and be effectively trained well, the option of doing so reaps the maximum profit to the company. On the basis of the data provided, it was analysed that hiring its own sales force gives the company a higher net operating income till the sales fall below a threshold level of $18,000,000. Current sales numbers do not indicate the likelihood of this happening in normal situation. The only issue that can be linked to choosing this option is the assumption of the effectiveness of the sales staff. The new staff are more likely to have less expertise because the current agents have an experience of many years. They have been on the job for a longer time, selling a variety of products, which gives them a bit of an edge over nay newcomer. The positive side that we can take for this is that our own staff will be trained to be more specialized and will have a focused effort directed only to our products. The challenge will be to get to hospital purchasing agents attention, who in many cased would prefer to deal with lesser number of agents for more number of products than vice versa. . As per the current estimates, we can afford a slight drop in sales for it will be compensated by the lower costs of managing our own sales force. Breakeven analyses show that as long as we are able to maintain a sales

level of $26,250,000, we will not incur any losses. Therefore, if we can be confident, that our own staff can generate sales of at least this amount, we can safely switch to this alternative.