Case 5-32 (Algo) Cost Structure: Break-Even and Target Profit Analysis (L05-4. L05-5. L05-6] Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no soles force of its own rather, it relies completely on independent sales agents to market its products. These agents are paid a soles commission of 1598 foram items sold. Barbara Cheney. Pittman's controller has just prepared the company's budgeted Income statement for next year as follows: tie, 089 ee 000 11, 210,000 790 Dee Pittman Compony Budgeted Income statement For the Year Ended December Sales Manufacturing expenses: Variable Fixed overhead Gross margin Selling and administrative expenses. Commissions to agents Fixed marketing expenses Fixed administrative expenses Net operating income Fixed interest expenses Incone before income taxes Income taxes (30% Ne come 2 em 19 099 be 2000 56 1.400 Primarily depreciation on storage facilities. As Barbara handed the statement to Kar Vecci, Pittman's president, she commented. I went ahead and used the agents 1586 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 209 That's the last straw. Kori replied angrily. "Those agents have been demanding more and more, and this time they've gone too fer. 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 I 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 7.54 commission to their own salespeople, along with a small salary. Of course, we would have to handle al promotion costs, too. We figure ourfbed expenses would increase by $2.850.000 per year, but that would be more than offset by the $2.800.000 205 * $19.000.000) that we would avoid on agents commissions The breakdown of the $2.850.000 cost follows: Salario Sales manager Salespersons Travel and entertainment Advertising Total 118,250 71 sea 473eee 2 g Super." replied Karl. "And I noticed that the $2,850.000 equals what we're paying the agents under the old 1599 commission rate, "It's even better than that," explained Barbara. We can actually save $87.400 a year because that's what were 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.gold Karl With the approval of the committee, we can move on the matter immediately Required: 1. Compute Pittman Company's break even point in colla sales format e sang a. The agents' commission rate remains unchanged 159 b. The agents' commission rate is increased to 20 c. The company employs its own sales force 2. Assume that Pittman Company decides to continua selling through agent and pay the 2014 commission rate, Determine the coller soles that would be required to generate the same neumeme ai dentalne te bogate contestatement for next year 3. Determine the dollar sales at which net neome would be equal regardless of wetu Pitoman company see through agents at a 209 commission rate) or employees for 4. Compute the degree of operating leverage that the company would expect to have at the end of nene year assuming Required: 1. Compute Pittman Company's break-even point in dollar sales for next year assuming e. The agents' commission rate remains unchanged at 15%. b. The agents' commission rate is increased to 20%. c. The company employs its own soles force. 2. Assume that Pittman Company decides to continue selling through agents and pays the 2096 commission rate. Determine the dollar soles 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 2096. . 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 Compule Pillman Company's bar and final answers to the u pon dollar salom bext year as CINTA al places