Determine the dollar sales at which net income would be equal regardless of whether Pittman Company sells th (at a 20% commission rate) or employs its own sales force. (Do not round intermediate calculations.) Volume of sales (in dollars) Sing Pitman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own rather.it roles completely on independent sales agents to market is products These agents are paid a sales commission of 15% for allem sold Barbara Cheney, Pittman's controller, has just prepared the company's budgeted income statement for next year as follows: Pitman Company Bugeted income statement For the Year Ended December 31 Sale $ 21.500.000 Manufacturing experts Variable $ 9,675.000 Fed overhead 3010000 12.685.000 Give expenses 0815.000 Commissions to agents 3,225,000 150.500 2.020.000 5.395 500 3.410.500 Fixed expenses 782800 Income before income taxes 2.607.000 Income taxes (30%) 800 100 Not income 1.866.900 *Primary depreciation on storage facilities As Barbara handed the statement to Kurt Vocel, Pittman proident, she commented, "went ahead and used at 15% commission rate in completing these statements, but we Vest learned that they use to handle our products not year unless we increase the commission rate to 20% That's the lost straw," Kart replied angry. "Those agents have been demanding more and more and this time they've gone too fat 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 at over for prodt," ropiled larbara say it's plain robbery." retorted Karl And I also say it's time we dumped those guys and got our own salos foron Can you put your people to work up some cool figures for us to look at Weve already worked them up, wild Barbara Several companies we know about pay a 7.8% comision to their own salespeople, along with a walalary Of course, we would have to handle promotion costs, too. We figure our foed openses would create by 55.225.000 per year, but that would be more than offset by the 54,300.000 (208321,500,000 that we would wold on agents com The breakdown of the $3,220.000 co follow Stars Sales manager Salesperson Travel and entertainment Advertising $ 154,375 306 250 637.500 1.745 825 55.225.000 Super." replied Kart. "And I noticed that the $3.225.000 equals what we're paying the agents under the old 15% commission rate." " soon better than that axplained Barbarn. "We can actually save $98.000 a year because that's what we're paying our audioes to check out the agents' reports. So our overall administrative expenses would be "Pull all of these numbers together and we'll show them to the executive committee tomorrow." said Karl,"with the approval of the committoo, we can move on the matter immediately Required: 1. Computer Pittman Company's break-even point in dollar sales for next year assuming a. The agents commission rate remains unchanged at 15% b. The agents commission rate is increased to 20% c. The company employs is own sales force 2. Assume that Pitnan Company decides to continue saling through agents and pay the 20% commission rato. Determine the dollar sales that would be required to generate the same not income as contained in the budgeted income statement for next year 3. Determine the dotar sales at which net income would be equat regardless of whether Pitman Company als through agents (at a 20% commission rate} or employs is own sales force. 4 Compute the degree of operating leverage that the company would expect to have at the end of next year assuming a. The agents commission rate remains unchanged at 15% t. The agents commission rate is increased to 20% 6. The company employs own sales force Use income before income taxes in your operating leverage computation
