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.

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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?

Marston Corporation Income Statement For theYear Ended December 31, 2008 Using Sales Agents $26,000,000 4 Using Own Sales Force $26,000,000 5 Revenues 6 Cost of goods sold Variable $11,700,000 2,870.000 $11,700,000 2,870,000 Fixed 14,570.000 11,430,000 14.570.000 9 Gross margin 10 Marketing costs 11 Commissions 12 Fixed costs 11,430,000 $ 4,680,000 3.420,000 $ 2,600,000 5,500,000 8.100,000 8.100,000 $ 3.330.000 13 Operating income $ 3.330,000