Choosing Between Compensation Plans Operating Leverage Cma Adapted Marston Corporation

Choosing between compensation plans, operating leverage (CMA, adapted) Marston Corporation manufactures pharmaceutical products that are sold through a network of external sales agents. The agents are paid a commission of 18% of revenues. Marston is considering replacing the sales agents with its own salespeople, who would be paid a commission of 10% of revenues and total salaries of $2,080,000. The income statement for the year ending December 31, 2008, under the two scenarios is shown here.

If you want to use Excel to solve this problem, go to the Excel Lab at www.prenhall.com/horngren/cost13e download the template for Problem 3-43.

1. Calculate Marston’s 2008 contribution margin percentage, breakeven revenues, and degree of operating leverage under the two scenarios.

2. Describe the advantages and disadvantages of each type of sales alternative.

3. In 2009, Marston uses its own salespeople, who demand a 15% commission. If all other cost behavior patterns are unchanged, how much revenue must the salespeople generate in order to earn the same operating income as in 2008?

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