3C-1

Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a sales commission of 20% for all items sold. Barbara Cheney, Pittman's controller, has just prepared the company's budgeted income statement for next year. The statement follows Pittman Company Budgeted Income Statement For the Year Ended December 31 $20,200,000 Variableuing expenses: $7,900,000 2,900,000 Fixed owerhead Gross margin Selling and administrative expenses: 10,800,000 9,400,000 4,040,000 260,000 Fixed marketing expenses Fixed administrative expenses Net operating income Fixed interest expenses Income before income taxes Income taxes (25%) Net income 6,800,000 2,600,000 1,920,000 480,000 S1,440,000 Primarily depreciation on storage facilities. As Barbara handed the statement to Karl Vecci, Pittman's president, she commented, "I went ahead and used the agents, 20% commission rate in completing these statements, but we've just leamed that they refuse to handle our products next year unless we increase the commission rate to 25%. That's the last straw," Karl replied angrily. Those agents have been demanding more and more, and this time they've gone too far. How can they possibly defend a 25% 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. 1 say it's just plain robbery," retorted Karl. "And I also say it's time we dumped those guys and got our own sales foroe. 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 7.8% commission to their own salespeople. along with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fixed expenses would increase by $4,040,000 per year, but that would be more than offset by the $5.050.000 (25% x $20,200,000) that we would avoid on agents' The breakdown of the $4,040,000 cost follows Salaries Sales manager $ 240,000 1,300,000 960,000 1,540,000 Travel and entertainment Advertising Total 4,040,000 "Super," replied Karl-"And I noticed that the S4 ,040,000 is just what we're paying the agents under the old 20% commission rate It's even better than that, explained Barbara. "We can actually save $145,000 a year because that's what we're having to pay the auditing firm now to check out the agents' reports. So our overall administrative expenses would be less. Pull all of these numbers together and well show them to the executive committee tomorrow," said Karl. "With the approval of the committee, we can move on the matter immediately Required: 1. Compute Pittman Company's break-even point in dollar sales for next year assuming: (Enter your answer in whole dollars and not in thousands. Round CM ratio to 3 decimal places and final answers to the nearest dollar amount.) a. The agents' commission rate remains unchanged at 20%. Break-even point in dollar sales b. The agents' commission rate is increased to 25%. Break-even point in dollar sales c. The company employs its own sales foroe. Break-even point in dollar sales