CVP ANALYSIS

Pitman company makes and sells electronic items. The company has independent sales agents who are paid 15% of revenue as sales commissions. The company has come up with the budget for next year.

Sales $16 m

Manufacturing expenses

Variable $7.2m

Fixed $2.34m

Selling and admin expenses

Sales commission $2.4m

Fixed marketing $120,000 ( all depreciation)

Fixed admn $1.725m

Fixed Auditing expense $75,000 ( to audit independent sales people)

Other expenses

Interest expense $540,000

Pre tax income $1.6m

Income tax @30% $480,000

Net income $1.12m

The sales agents are now demanding a 20% commission rate. So the company is thinking of creating its own sales department. The new sales department will have the following fixed costs:

Sales manager salary $100,000

Sales people salary $600,000

REQUIRED

1. Compute the break even point in dollar sales under each of the following option.

2. Based on your answers for question 4, what would be the change in net income if sales decreased by 10%?

Tax rate remains at 30% for all options.