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5 Saved Help Save & Exit Submit vo Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own rather. It relles 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: Pittman Company Brudgeted Income Statement For the Year Ended December 31 $ 21,500,000 Manufacturing expenses Variable $ 9,675,000 Fixed overhead 3,010,000 12.663.000 Gros margin 8.815,000 Selling and administrative expens Comissions to agents 3,225,000 Tixed marketing expenses 150,500 Fixed administrative expenses 2.020,000 5395,500 Het operating inoon 3,419.500 Fixed interest expenses 752,500 Incone before in taxes 2.667.000 Income taxes (301) 800,100 5.1,866,900 "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 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 for. How can they possibly defend a 20% commission rate?" Het non Prey 1 of 2 18 Next > As Barbara Funded the statement to Karl Veccl, Petman'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 angry. "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 proft," replied Barbora "I say it's just plain robbery retorted Kart "And I ho say it's time we dumped those guys and got our own salesforce. 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 75% commission to their own salespeople, Mong with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fived expenses would increase by $3.225.000 per year, but that would be more than offset by the $4,300,000 (20%*$21.500,000) that we would avoid on agents commissions The breakdown of the $3,225.000 cost follows: Salari tales ale persone Travel and stets Advertising Total 134.375 806,250 337,500 1,146,75 $ 3,225,000 *Supec roplied Kari. "And I noticed that the $3.225.000 equals what were paying the agents under the old 15% commission rate, even better than that exisined Barbara 'We can actually save $98,900 a year because that's what we're paying our auditors to check out the agents reports 50 our overal administrative expenses would be less." Prey 1 of 2 18 Next > Save & Exit Submit 6 Saved Help Required: 1. Compute 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%. c. The company employs its own sales force. 2. Assume that Pittman Company decides to continue seling 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 (et a 20% commission rate) or employs its own sales force. 4. Compute the degree of operating leverage that the company would expect to have at the end of next 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 Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required Required 4 Compute Pittman Company's break even point in dollar sales for next year assuming (Round CM ratio to 3 decimal places and final answer to the nearest dollar amount) Break Even Point