59 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 15% for all items sold. Barbara Cheney, Pittman's controller, has just prepared the company's budgeted income statement for next year as follows: Sales Pittman Company Budgeted Income Statement For the Year Ended December 31 Manufacturing expenses: Variable - Fixed overhead Gross margin Selling and administrative expenses: Commissions to agents Fixed marketing expenses $ 22,500,000 $ 10,125,000 3,150,000 3,375,000 13,275,000 9,225,000 Fixed administrative expenses 157,500* 2,060,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) Net income *Primarily depreciation on storage facilities. 5,592,500 3,632,500 787,500 2,845,000 853,500 $ 1,991,500 As Barbara handed the statement to Karl Vecci, 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 next year unless we increase the commission rate to 20%." "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 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.