The annual planning process at Century Office Systems, Inc. had been arduousbut produced a number of important marketing initiatives for the next year. Mostnotably, company executives had decided to restructure its product-marketingteam into two separate groups:
(1) Corporate Office Systems and
(2) HomeOffice Systems. Angela Blake was assigned responsibility for the Home OfficeS ystems group, which would market the company's word-processing hardwareand software for home and office-at-home use by individuals.
Her marketingplan, which included a sales forecast for next year of $25 million, was the resultof a detailed market analysis and negotiations with individuals both inside andoutside the company. Discussions with the sales director indicated that 40 percent of the company sales force would be dedicated to selling products of theHome Office Systems group. Sales representatives would receive a 15 percentcommission on sales of home office systems. Under the new organizationalstructure, the Home Office Systems group would be charged with 40 percent ofthe budgeted sales force expenditure.The sales director's budget for salaries andfringe benefits of the sales force and noncommission selling costs for both theCorporate and Home Office Systems groups was $7.5 million.
The advertising and promotion budget contained three elements: trademagazine advertising,cooperative newspaper advertising with Century OfficeSystems, Inc. dealers, and sales promotion materials including productbrochures, technical manuals, catalogs, and point-of-purchase displays. Trademagazine ads and sales promotion materials were to be developed by thecompany's advertising and public relations agency. Production and mediaplacement costs were budgeted at $300,000. Cooperative advertising copyfor both newspaper and radio use had budgeted production costs of$100,000.
Century Office Systems, Inc.'s cooperative advertising allowancepolicy stated that the company would allocate 5 percent of company sales todealers to promote its office systems. Dealers always used their completecooperative advertising allowances.Meetings with manufacturing and operations personnel indicated thatthe direct costs of material and labor and direct factory overhead to producethe Home Office System product line represented 50 percent of sales.
The accounting department would assign $600,000 in indirect manufacturingoverhead (for example, depreciation, maintenance) to the product line and$300,000 for administrative overhead (clerical, telephone, office space, and soforth). Freight for the product line would average 8 percent of sales.Blake's staff consisted of two product managers and a marketing assistant.Salaries and fringe benefits for Ms. Blake and her staff were $250,000 per year.
a. Prepare a pro forma income statement for the Home Office Systemsgroup given the information provided.
b. Prepare a pro forma income statement for the Home Office Systemsgroup given annual sales of only $20 million.
c. At what level of dollar sales will the Home Office Systems group breakeven?