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Chapter $6$ Case

Morocco Corporation manufactures disposable thermometers that are sold to hospitals through a network of independent sales agents located in the United States and Canada. These agents sell a variety of products to hospitals in addition to Morocco$$s disposable thermometer. The sales agents are currently paid an $18\%$ commission on sales, and this commission rate was used when Morocco$$s management prepared the following budgeted income statement for the coming year.

Morocco Corporation

Budgeted Income Statement

Sales..................................... $$30,000,000$

Cost of Goods Sold:

Variable......................... $$17,900,000$

Fixed............................ $2,300,00020,200,000$

Gross Margin........................... $9,800,000$

Selling and Admin. Expenses:

Commissions................... $5,400,000$

Fixed Advertising Exp....... $800,000$

Fixed Admin. Exp............ $3,200,0009,400,000$

Net Operating Income................. $ $400,000$

Since completion of the above statement, Morocco$$s management has learned that the independent sales agents are demanding an increase in the commission rate to $20\%$ of sales for the upcoming year. This would be the third increase in commissions demanded by the independent sales agents in five years. As a result, Morocco$$s management has decided to investigate the possibility of hiring its own sales staff to replace the independent sales agents.

Morocco$$s controller estimates that the company will have to hire eight salespeople to cover the current market area, and the total annual payroll cost of these employees will be about $$700,000,$ including fringe benefits. The salespeople will also be paid commissions of $10\%$ of sales. Travel and entertainment expenses are expected to total about $$600,000$ for the year. The company will also have to hire a sales manager and support staff whose salaries and fringe benefits will come to about $$200,000$ per year. To make up for the promotions that the independent sales agents had been running on behalf of Morocco, management believes that the company$$s budget for fixed advertising expenses should be increased by $$500,000.$

Required:

$1.(4$ points$)$ Assuming sales of $$30,000,000,$ construct a budgeted contribution margin format income statement for the upcoming year with the following alternatives:

a$.$ The independent sales agents$$ commission rate stays the same at $18\%.$

b$.$ The independent sales agents$$ commission rate increases to $20\%.$

c$.$ The company employs its own sales force.

$2.(2$ points$)$ Calculate Morocco$$s break$-$even point in sales dollars next year for each of these alternatives:

a$.$ The independent sales agents$$ commission rate stays the same at $18\%.$

b$.$ The independent sales agents$$ commission rate increases to $20\%.$

c$.$ The company employs its own sales force.

$($continued on next page$)$

$3.(2$ points$)$ Refer to your answer in $(1)($b$)$ above. If the company employs its own sales force, what volume of sales would be necessary to generate the same net operating income the company would generate in $(1)($b$)$ above?

$4.(2$points$)$ Determine the volume of sales at which net operating income would be equal regardless of whether Morocco Corporation sells through agents $($at a $20\%$ commission rate$)$ or employs its own sales force.

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