Solved: Marston Corporation manufactures pharmaceutical

products sold th

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 percent
commission on sales; that percentage was used when Marston prepared the following budgeted
income statement for the fiscal year ending June 30, 2010.

Since the completion of the income statement, Marston has learned that its sales agents are
requiring a 5 percent increase in their commission rate (to 23 percent) 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 percent. 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, 2010, if the company hires its own sales force and increases its advertising costs.
2. If Marston continues to sell through its network of sales agents and pays the higher
commission rate, determine the estimated volume in sales dollars that would be required to
generate the same operating profit as projected in the budgeted income statement.
3. Describe the general assumptions underlying breakeven analysis that limit its usefulness.
4. 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?
5. What are the ethical issues, if any, that Tom should consider?
(CMAAdapted)

ANSWER
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