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Case 5-33 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

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Case 5-33 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: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses: Variable Fixed overhead Gross margin Selling and administrative expenses Commissions to agents Tixed marketing expenses Fixed administrative expenses Net operating income Fixed interest expenses Income before income taxes Ineome taxes (304) $17,500,000 $7,875,000 10,325,000 7,175,000 2,450,000 2,625,000 122,500 1,860,000 4,607,500 2,567,500 612,500 1,955,000 586,500 $1,368,500 Net income "Primarily 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 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. I sav it's lust nlain robbery" retorted Ys 1 Case 5-33 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: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses: Variable Fixed overhead Gross margin Selling and administrative expenses Commissions to agents Tixed marketing expenses Fixed administrative expenses Net operating income Fixed interest expenses Income before income taxes Ineome taxes (304) $17,500,000 $7,875,000 10,325,000 7,175,000 2,450,000 2,625,000 122,500 1,860,000 4,607,500 2,567,500 612,500 1,955,000 586,500 $1,368,500 Net income "Primarily 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 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. I sav it's lust nlain robbery" retorted Ys 1

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