Case 5-32 (Algo) Cost Structure; Break-Even and Target Profit Analysis [LO5-4, LO5-5, LO5-6] 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 $ 17,500,000 $ 7,875,000 2,450,000 2,625,000 10,325,000 7,175,000 Fixed administrative expenses 122,500+ 1,860,000 4,607,500 Net operating income Fixed interest expenses. Income before income taxes Income taxes (30%) Net income "Primarily depreciation on storage facilities. 2,567,500 612,500 1,955,000 586,500 $ 1,368,500 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.