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

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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………………………. 2,300,000                          20,200,000

Gross Margin………………………                                9,800,000

Selling and Admin. Expenses:

Commissions………………. 5,400,000

Fixed Advertising Exp……. 800,000

Fixed Admin. Exp………… 3,200,000                           9,400,000

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. (2points) 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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