all 4 parts and please make answers clear and visible
Pittman Company is a small but growing manufacturer of telecommunication 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: Pittman Company Hudgeted Income statement For the Year Unded December 31 Sales $ 21,500,000 Hartoring expenses Variable $ 9,695,000 Fixed overhead 3,010,000 12,665,000 Cea margin 0.815,000 Selling and adinistrative expenses Commissione to agents 3,225,000 Fixed marketing expenses 150,500 Fixed administrative expenses 2.020.000 5,195,500 Net operating inone 3,419.500 Fixed interest expenses 212500 Inice before income taxes 2.667,000 Income taxes (308) B0.100 Set income $ 1,666.900 *Primarily depreciation on storage facilities As Barbara handed the statement to Karl Vecel, 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." Kari replied angrily. "Those agents have been demanding more and more, and this time they've gone too fac How can they possibly defend a 20% commission rate? As Barbara handed the statement to Kart 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 " 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 75% 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 $3,225,000 per year, but that would be more than offset by the $4,300,000 (20% * $21.500,000) that we would avold on agents commissions." The breakdown of the $3,225,000 cost follows: Salaries Sales manager Salesperson Travel and entertainment Advertising Total # 134,375 806,250 537.500 1.746.875 $3,225,000 "Super" replied Kart. "And I noticed that the $3.225.000 equals what we're paying the agents under the old 15% commission rate." It's even better than that," explained Barbara. "We can actually save $98,900 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." "Super" repled Karl "And I noticed that the $3.225.000 equals what we're paying the agents under the old 15% commission rate." "It's even better than that explained Barbara. "We can actually save $98,900 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 committee tomorrow." said Karl. "Wah the approval of the committee, we can move on the matter immediately Required: 1. Computer Pittman Company's break-even point in dolar 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 incore as contained in the budgeted income statement for next yea 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 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. Prev 1 of 2 !! Next >
