Revenue and Independent Sales Agents

Company manufactures a high-quality plastic pipe that goes through three processing stages prior to completion. Information on work in the first department, Cooking, is given below for May: Production data:|  | Pounds in process, May 1: materials 100%|  | complete; conversion 90% complete| 70,000| Pounds started into production during May| 350,000| Pounds completed and transferred to the next department| ? | Pounds in process, May 31: materials 75% complete;|  |conversion 25% complete| 40,000| Cost data:|  |

Work in process inventory, May 1:|  | Materials cost| $86,000| Conversion cost| $36,000| Cost added during May:|  | Materials cost| $447,000| Conversion cost| $198,000| The company uses the weighted-average method. Required: 1. Compute the equivalent units of production. 2. Compute the costs per equivalent unit for the month. 3. Determine the cost of ending work in process inventory and of the units transferred out to the next department. 4. Prepare a cost reconciliation report for the month.

Comprehensive Problem—Weighted-Average Method Honeybutter. Inc.. manufactures a product that goes through two departments prior to completion—the Mixing Department followed by the Packaging Department. The follow ing information js available about work in the first department, the Mixing Department, during June. Required: Assume that the company uses the weighted-average method. 1. Determine the equivalent units for June for the Mixing Department. 2. Compute the costs per equivalent unit for June for the Mixing Department.

Determine the total cost of ending work in process inventory and the total cost of units transferred to the Packaging Department. 4. Prepare a cost reconciliation report for the mixing department for June. CASE STUDY Cost Structure;Break-Even Point;Target Profits Marston Corporation manufactures disposable thermometers that are sold to hospitals through a network of independent sales agents located in the United States and Canada. These sales agents sell a variety of products to hospitals in addition to Marston’s disposable thermometer.

The sales agents arc currently paid an l8% commission on sales. and this commission rate was used when Marston’s management prepared the following budgeted absorption income statement for the upcoming year Marston Corporation| Budgeted Income Statement| Sales|  | $30,000. 000| Cost of goods sold:|  |  | Variable| $17,400. 000|  | Fixed| 2,800. 00| 20,200,000| Gross margin|  | 9,800,000| Selling and administrative expenses:|  |  | Commissions| 5,400,000|  | Fixed advertising expense| 800,000|  | Fixed administrative expense| 3,200,000| 9,400,000| Net operating income|  | $ 400.000|

Since the completion of the above statement. Marston’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, Marston’s management has decided to investigate the possibility of hiring its own sales staff to replace the independent sales agents. Marston’s controller estimates that the company will have to hire eight sales people 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 $400. 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 $400,000per year. To make up for the promotions that the independent sales agents had been running on behalf of Marston. management believes that the company’s budget for fixed advertising expenses should be increased by $500,000.

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%. b. The independent sales agents’ commission rate increases to 20% c. The company employs its own sales force. 2. 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. 3. Refer to your answer to (1) (b) above If the company its own sales force what hat volume of sales all, would be necessary to generate the net operating income in come the company would realize if sales are $30,000,000 and the company continues to sell through agents (at a 20% commission rate)? 4. Determine the volume of sales at which net operating income would beequal regardless of whether Marston Corporation sells through agents (at a 20% commission rate) or employs its own sales force.

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 is own sales force. On the graph. use total sales revenue as the measure of activity. 6. 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% cornmission rate: or employ its own sales force. Fully explain the reasons for your recommendation in the memo.

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