2) The annual planning process at Advanced Technology Systems, Inc. (ATS) identified several new marketing initiatives for the next year. Company executives had decided to restructure its product-marketing team into two separate groups: (1) Corporate Office Systems (COS) and (2) Home Office Systems (HOS). Angel Bloch was assigned the responsibility for the Home Office Systems group, which would market the company’s word processing hardware and software for home and office-at-home use by individuals. His marketing plan, which included an HOS sales forecast for the next year of $150 million, was the result of a detailed market analysis and negotiations with individuals both inside and outside the company. Discussions with the sales director indicated that 30 percent of the ATS sales force would be dedicated to selling products of the HOS group. Thus, under the new organizational structure, the HOS group would be charged with 30 percent of the total ATS budgeted non-commission-based sales force expenditures. The sales director’s budget for salaries and fringe benefits of the sales force and noncommission selling costs for ATS was $42 million. HOS sales representatives would receive a 12.5 percent commission on sales of home office systems. The advertising and promotion budget for HOS contained three elements: trade magazine advertising, cooperative newspaper advertising with ATS dealers, and sales promotion materials including product brochures, technical manuals, catalogs, and point-of-purchase displays. Production and media placement costs for trade magazine advertising were budgeted at $7.5 million. ATS’s cooperative advertising allowance policy stated that the company would allocate 6 percent of sales to dealers to promote its office systems. Dealers always use their complete cooperative advertising allowances. Sales promotional materials had budgeted production costs of $2.5 million. Meetings with manufacturing and operations personnel indicated that the direct costs of material and labor and direct factory overhead to produce the Home Office System product line represented 45% of sales. The accounting department would assign $7,200,000 in indirect manufacturing overhead (for example, depreciation, maintenance) to the product line and $2,250,000 for administrative overhead (clerical, telephone, office space, etc.) Freight for the product line would average 9 percent of sales. Bloch’s staff consisted of two product managers and a marketing assistant. Salaries and fringe benefits for Mr. Bloch and his staff were $975,000 per year. a. Prepare a pro forma income statement for the Home Office Systems group. b. Mr. Bloch thought there was a good chance that HOS may not reach the goal of $150 million in sales and that sales could be as much as one-third lower at $100 million. Prepare a pro forma income statement for the Home Office Systems group given annual sales of $100 million. c. At what level of dollar sales does the Home Office Systems group break even?

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