Cost Structure; Break-Even and Target Profit Analysis (10 marks) 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. The statement follows: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales $16,000,000 Manufacturing expenses: Variable $7,200,000 Fixed overhead 2,340,000 9,540,000 Gross margin.. 6,460,000 Selling and administrative expenses: Commissions to agents. 2,400,000 Fixed marketing expenses 120,000* Fixed administrative expenses 1,800,000 4,320,000 Net operating income............. 2,140,000 Fixed interest expenses.. 540,000 Income before income taxes Income taxes (30%) Net income "Primarily depreciation on storage facilities. 1,600,000 480,000 $ 1,120,000 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 advertising, travel, and the other costs of promotion, there's nothing left over for profit," replied Barbara. 2