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egipment. The company has no sales ne of its own; rather, it relies completely on independent sales apents to market its products. These agents are paid a sales commission of 15% for all items sold. Barbara Cheney, Pitman's controller, has just prepared the company's budgeted income statement for next year as follows: Pittman Company Budgeted Income Statement For the Year Ended December 3 Sales 16000,000 Fixed overhead 23400009540.009 6.460,000 Gross margin Selling and administrative expenses Commissions to agents Fixed marketing expenses Fixed administrative expenses 120,000 100000 4320.000 Net operating income Barbara Cheney, Pittman's controller, has just prepared the company's bodgeted income statement for nest year as follows Pittman Company Budgeted Income Statement For the Year Ended December 3 Sales 16.000.000 Variable Fxed oveehead 2.340.0009540.000 Gross margin Selling and administrative expenses: Commissions to agents Fixed marketing expenses Fixed administrative expenses1800000 120,000 Net operating income Fxed interest expenses Income before income taxes Income taxes on Net income 4.320.000 2.340,000 540.000 1600,000 480.000 S 1120.000 depreciation on storage faciites As Barbara handed the statement to Karl Vicci, Pittman's president, she commented, "I went ahead and used the agents' 15% commission rate in completing these statements, but we've just learned that they refuse to handle our products nest year unless we increase the commission rate to 20 Thait's the last straw. Karl replied angrily. Those agents have been demanding more and mone, and this time they've gone too far How can they possibly defend a 20% commission rate?" They claim that after paying for advertising, travel, and the other costs of promotion, there's nothing left over for profit," replied Barbara say its just plain robbery. retorted Karl "And I also say it's time we dumped those guys and got our own sales fonce. Can you get your people to work up some cost figures for us to look at I say it's just plain robbery," retorted Karl "And I also say it's time we dumped those guys and got our own sales force. Can you get your people to work up some cost figures for us to look at ..We've already worked them up," said Barbara-Several companies we know about pay a 7.5% commission to their own salespeople, along with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fised expenses would increase by $2.400,000 per year, but that would be more than offset by the $3,200,000 (0% x $16.000,000) that we would avoid on agents' commissions The breakdown of the $2,400,000 cost follows Page 241 Sales manager Salespersons 5 100,000 600,000 Travel and entertainment400,000 Advertising Total $2.400,000 "Super, replied Karl "And I noticed that the S2A00,000 equals what we're paying the agents under the old 5% commission rate." It's even better than that." explained Barbara "We can actually save $75,000 a year because that's what we're paying our auditors to check out the agents reports. So our overall administrative expenses would be less Pull all of these numbers together and we'll show them to the executive committce tomornow." said Karl. "With the approval of the committee, we can move on the matter immediately. Required 1. Compate Pittman Company's break-even point in dollar sales for next year assuming a. The agents' commission rate remains unchanged at 15%. b. The agents commission rate is increased to 20% .The company employs its own sales force 2. Assume that Pittman Company decides to continue selling through agents and pays the 20 commission rate. Determine the dollar sales that would be required to generate the same net income as contained in the budgeted income statement for next year 3. Determine the dollar sales at which net income would be equal regardless of whether Pittman Company sells through agents (at a 20% commission rate) or employs its own sales force Compute the degree of operating leverage that the company would expect to have at the end of mext year assuming a. The agents' commission rate remains unchanged at 15%. b. The agents commission rate is increased to 20% c. The company employs its own sales force. Use income before income taxes in your operating leverage computation 5. Based on the data in (1) through (4) above, make a recommendation as to whether the company should continue to use sales agents (at a 20% commission rate) or employ its own sales free. Give reasons fr your answer. egipment. The company has no sales ne of its own; rather, it relies completely on independent sales apents to market its products. These agents are paid a sales commission of 15% for all items sold. Barbara Cheney, Pitman's controller, has just prepared the company's budgeted income statement for next year as follows: Pittman Company Budgeted Income Statement For the Year Ended December 3 Sales 16000,000 Fixed overhead 23400009540.009 6.460,000 Gross margin Selling and administrative expenses Commissions to agents Fixed marketing expenses Fixed administrative expenses 120,000 100000 4320.000 Net operating income Barbara Cheney, Pittman's controller, has just prepared the company's bodgeted income statement for nest year as follows Pittman Company Budgeted Income Statement For the Year Ended December 3 Sales 16.000.000 Variable Fxed oveehead 2.340.0009540.000 Gross margin Selling and administrative expenses: Commissions to agents Fixed marketing expenses Fixed administrative expenses1800000 120,000 Net operating income Fxed interest expenses Income before income taxes Income taxes on Net income 4.320.000 2.340,000 540.000 1600,000 480.000 S 1120.000 depreciation on storage faciites As Barbara handed the statement to Karl Vicci, Pittman's president, she commented, "I went ahead and used the agents' 15% commission rate in completing these statements, but we've just learned that they refuse to handle our products nest year unless we increase the commission rate to 20 Thait's the last straw. Karl replied angrily. Those agents have been demanding more and mone, and this time they've gone too far How can they possibly defend a 20% commission rate?" They claim that after paying for advertising, travel, and the other costs of promotion, there's nothing left over for profit," replied Barbara say its just plain robbery. retorted Karl "And I also say it's time we dumped those guys and got our own sales fonce. Can you get your people to work up some cost figures for us to look at I say it's just plain robbery," retorted Karl "And I also say it's time we dumped those guys and got our own sales force. Can you get your people to work up some cost figures for us to look at ..We've already worked them up," said Barbara-Several companies we know about pay a 7.5% commission to their own salespeople, along with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fised expenses would increase by $2.400,000 per year, but that would be more than offset by the $3,200,000 (0% x $16.000,000) that we would avoid on agents' commissions The breakdown of the $2,400,000 cost follows Page 241 Sales manager Salespersons 5 100,000 600,000 Travel and entertainment400,000 Advertising Total $2.400,000 "Super, replied Karl "And I noticed that the S2A00,000 equals what we're paying the agents under the old 5% commission rate." It's even better than that." explained Barbara "We can actually save $75,000 a year because that's what we're paying our auditors to check out the agents reports. So our overall administrative expenses would be less Pull all of these numbers together and we'll show them to the executive committce tomornow." said Karl. "With the approval of the committee, we can move on the matter immediately. Required 1. Compate Pittman Company's break-even point in dollar sales for next year assuming a. The agents' commission rate remains unchanged at 15%. b. The agents commission rate is increased to 20% .The company employs its own sales force 2. Assume that Pittman Company decides to continue selling through agents and pays the 20 commission rate. Determine the dollar sales that would be required to generate the same net income as contained in the budgeted income statement for next year 3. Determine the dollar sales at which net income would be equal regardless of whether Pittman Company sells through agents (at a 20% commission rate) or employs its own sales force Compute the degree of operating leverage that the company would expect to have at the end of mext year assuming a. The agents' commission rate remains unchanged at 15%. b. The agents commission rate is increased to 20% c. The company employs its own sales force. Use income before income taxes in your operating leverage computation 5. Based on the data in (1) through (4) above, make a recommendation as to whether the company should continue to use sales agents (at a 20% commission rate) or employ its own sales free. Give reasons fr your
