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 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: Sales Pittman Company Budgeted Income Statement For the Year Ended December 31 Manufacturing expenses $18,500,000 Variable $8,325,000 Fixed overhead 2,590,000 10,915,000 Gross margin 7,585,000 Selling and administrative expenses: Commissions to agents 2,775,000 Fixed marketing expenses Fixed administrative expenses 129,500. 1,900,000 4,804,500 Net operating income 2,780,500 Fixed interest expenses Income before income taxes 647,500 2,133,000 639,900 1,493,100 Income taxes (30) Net incone "Primarily depreciation on storage facilities. As Barbare 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 fac 9 of 12 >