Case 2.92 Cost Structure Break-Even and Target Proft Analysis Answer each question as ir you were a consultant hired by the company and ere peesenting to the prevident. For esch answer eyplain the teeminoliogy and concepts used. For example, in as rather than just give the broakeven for esch scenario, explain the change in the volume of salos. explain the calculasion - thils ha proleswional teport from ar conwalint to an excovive commetes Use outside sources when necencany BUT MAKE SURE YOU CITE THEME When giving a recoemmendation, backit up with rumbers. The particular answer should be an execulve cammitee veport that is no mere than 4 pages in length Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own, tather, 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: PPrimanly 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 leamed 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 advenising, travel, and the other costs of promotion, there's nothing left over for profic", replied Barbara 7 say it's jubt plain robbery; retorted Karl "And lako 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 $3,675,000 per yeat, but that would be more than offset by the $4,900,000(20$$24.500,000) that we would avoid on agents? "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 fixed expenses would increase by $3,675,000 per year, but that would be more than offset by the $4,900,000(20%$24,500,000) that we would avoid on agents' commissions: The breakdown of the $3,675,000 cost follows: "Super," replied Karl. "And I noticed that the $3,675,000 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 \$112,700 a year because that's what we're paying our audirors 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 Kart. "With the opproval 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: 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 selling through agents and pays the 20% commission rate. Determine the doilar 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. 4. Compute the degree of operating leverage that the company would expect to have at the end of next year assuming: a. The agent's commission rate remains unchanged at 15%. b. The ogents commission rate is increased to 20% c. The company employs its own sales force Use income before income taxes in your operating leverage computation. c. 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 d 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 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. Compute Pittman Company's break-even point in dollar sales for next year assuming: Note: Round CM ratio to 3 decimal places and final answers to the nearest dollar amount. 2. Assume that Pittman Company decides to continue selling through agents and pays the 20% commission rate. Determine the doilar sales that would be required to generate the same net income as contained in the budgeted income statement for next yeat 3. Determine the dollar sales at which net income would be equal regardiess 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. Assume that pittman Company decldes 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, Note: Pound CM natio to 3 decimal places and final answer to the nearest dollar amount. c. 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. 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. Determine the dollar sales at. which net income would be equal regardlese of whether pittman Company sells through agents (at a 20% commission rate) or employs its own sales force. Note: Do not round intermediate calculations. c. 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. 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. Compute the degree of operating leverage that the company would uxpect to have at the end of next year assuming: (Use income before income taxes in your operating leverage computation.) Noter Round your answers to 2 decimal place?s