CASE 5-33 cost strucmre; Break-Even and Target Prom Analysis [L054 Los-s, L05-61 Pittman Company LS a small but growing manufacturer of equipnnt. The company has no sales forc of its own; rather, it relies completely on indevvldent sales agents to market its products. These agents are paid a sales commission of 1 for all items sold. Barbara Cteney, Pittman s controller, has just prepared the umpany's budgeted income state- ment for next year. The statement follows: Attman Company Iru:ome Statement For the Year Erded December 31 M anu factoring expenses: Fixed overhead Gross margin . Seling and administrative expenses: Commissions to agents Fixed marketing expenses . Fixed administrative expenses Net operating income Fixed interest exWIses Income before hcomg taxes . Income taxes (30%) 2540.000 6,460.000 2.400. f 20,coo 4,320.000 2.140.000 1,603.000 480.000 S 1,120 coo As Barbara handed the statement to Karl Vecci, Pittman's president, she commented. "I went ahead and used the agents' 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 "That's the last straw," Karl replied angrily. "Those agents have been ckmanding more and more, and this time they've gone far. How can they gssibly defend a commission rater "They claim that after paying for xlvertising, travel, and the other costs of promotion, there's left over for profit," replied Barbara. "I say it's just plain robbery," retorted Karl. "And I also say it's time we dunukd those guys and gd our own sales force. Can you get your to work up some figures for us to look at?" "We've already worked them up," said Barbara. "Several companies we know about pay a 7.5% commission to their own salespeople, along with a small salary. Of curse. we would have to handle all promotim costs, too. We figure our fixed expenses would increase by year. but that would more than offset by the (20% X S that we would avoid on agents' commissions."