Pitman 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 Borbarn Cheney, Patman's controller, has just prepared the company's budgeted income statement for next year as follows: Mitas Company Budgeted Tocant or the Year Ended December 31 Folms 1 16,000,000 Manufacturis expenses Variable $ 7,200,000 Tie verled 2.300.000 8.540.000 Cross margin 6,400.000 telling and administrative expenses Comissions to ente 2,400,000 Pe marketing en 120.000 Tied administrative expenses 4,120,000 Wet operating income 2,100.000 Tied Interest expenses 560,055 Income before income taxes 1,600,000 Tacones (10) et come $ 1,120.000 *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. Kart 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 11 say its just plain robbery retorted Karl. "And I also say it's time we dumped those guys and got our own sales force. Can you get your people to work up some cost figures for us to look at "We've already worked them up." said Barbara Several companies we know about pay a 75% commission to their own salespeople, along with a small salary Of course, we would have to handle al promotion costs, too. We figure our fixed expenses would increase by $2.400.000 per year, but that would be more than offset by the $3.200.000 20% $15.000.000 that we would avoid an agents commissions The breakdown of the $2,400.000 cost follows Salaries sales mar $100,000 Salespersone 600.000 Travel and entertainment 400,000 Advertising Total 1 3.400,000 "Super replied art. "And I noticed that the $2.400.000 equals what we're paying the agents under the old 15% commission rate *#'s even better than that explained Barbara. "We can actually save $75,000 a year because that's what were paying our auditors to Check out the agents reports. So our overall administrative expenses would be less." "Put all of these numbers together and we'll show them to the executive committee tomorrow' said Kart We the approval of the committee, we can move on the matter immediately Required: Computerman Company's break even point in dollar sales for next year assuming a. The agents commission rate remains unchanged at 15% The agents' commission rate is increased to 20% c. The company employs its own salesforce. 2. Assume that Pitman Company decides to continue selling through agents and pays the 20% commission rate Determine the dollar sales that would be required to generate the same net income as contained in the budgeted Income statement for next year 2 Determine the dollar sales at which net income would be equal regardless of whether Pittman Company sells through agents at a 20% commission rate) or employs its own salesforce 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% b. The agents' commission rate is increased to 20% c. The company employs its own sales force Use Income before income taxes in your operating leverage computation