Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Pitman Company is a small but growing manufacturer of telecommunications equlpment. The company has no sales force of its own; rathec, it relies completely on

image text in transcribed
image text in transcribed
Pitman Company is a small but growing manufacturer of telecommunications equlpment. The company has no sales force of its own; rathec, it relies completely on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items soid Barbara Cheney, Pittman's controller, has just prepared the combanv's hurinatay income statement for next year as follows. As Barbora handed the statement to Kart Vecel, Pitimen's president, she commented. 'I went ahead and used the agents' isk commission rate in completing these statements, but we ve just lesened that they refuse to handle our products next year uniess we increase the commission rate to 20x " That's the iost straw" Karl replied angrily. Those ogents have been demanding more and more, and this time they wo gorse too far: How can they possibly defend a 200 commission rate? "They claim that after paying for advertsing, travet, and the other costs of promotion, theres nothing left aver for profic; replied Barbara I say ifs just plain robbery" retorted Korl "And I also say it's time we dumped those gun and got our owr sales force. Con you get your people to work up some cost figures for us to look at?" We ve aiready worked them ue, shid Aarbere. "Several campanies we know about pay a 75% commistion to their omn salespeople. wlong with a small salary Of course, we woild have to handie all promotion conts, too We feule our fixed erpenses would inciesese by 53,525,000 per yeac, bert that would be more than offset by the $4,700.000 (20s $23,500,000 that we would avoid on agonts The treokdown of the $3,525.000 cost folltws "Super," replied Kart, "And I noticed that the $3,525,000 equals what we're paying the agents under the old 15% commission rate." "It's even better than that" explained Barbara. "We can actually save $108,100 a year because that's what we're poying our auditors to check out the agents' reports. So our overall administrative expenses would be less?" "Puil all of these numbers together and we7l show them to the executive committee tomorrow, "said KarL. "With the approval of the committee, we can move on the matter immediately." Required: 1. Compute 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 its own sales force. 2. Assume that Pittman 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. 3. Determine the dollar sales at which net income would be equal regardless of whether Pitman Company solls through agents lat a 20 s commission rate) or employs its 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% b. The agents' commission rate is increased to 20%. c. The company employs its own sales force. Use income before income toxes in your operating leverage computation. Complete this question by entering your answers in the tabs below. Complte Pitman Company's breakeven point in dollar sales for next year assuming: (Round CM ratio to I decimal places ind fingl onwwers to the neareat dolar amount:) Pitman Company is a small but growing manufacturer of telecommunications equlpment. The company has no sales force of its own; rathec, it relies completely on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items soid Barbara Cheney, Pittman's controller, has just prepared the combanv's hurinatay income statement for next year as follows. As Barbora handed the statement to Kart Vecel, Pitimen's president, she commented. 'I went ahead and used the agents' isk commission rate in completing these statements, but we ve just lesened that they refuse to handle our products next year uniess we increase the commission rate to 20x " That's the iost straw" Karl replied angrily. Those ogents have been demanding more and more, and this time they wo gorse too far: How can they possibly defend a 200 commission rate? "They claim that after paying for advertsing, travet, and the other costs of promotion, theres nothing left aver for profic; replied Barbara I say ifs just plain robbery" retorted Korl "And I also say it's time we dumped those gun and got our owr sales force. Con you get your people to work up some cost figures for us to look at?" We ve aiready worked them ue, shid Aarbere. "Several campanies we know about pay a 75% commistion to their omn salespeople. wlong with a small salary Of course, we woild have to handie all promotion conts, too We feule our fixed erpenses would inciesese by 53,525,000 per yeac, bert that would be more than offset by the $4,700.000 (20s $23,500,000 that we would avoid on agonts The treokdown of the $3,525.000 cost folltws "Super," replied Kart, "And I noticed that the $3,525,000 equals what we're paying the agents under the old 15% commission rate." "It's even better than that" explained Barbara. "We can actually save $108,100 a year because that's what we're poying our auditors to check out the agents' reports. So our overall administrative expenses would be less?" "Puil all of these numbers together and we7l show them to the executive committee tomorrow, "said KarL. "With the approval of the committee, we can move on the matter immediately." Required: 1. Compute 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 its own sales force. 2. Assume that Pittman 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. 3. Determine the dollar sales at which net income would be equal regardless of whether Pitman Company solls through agents lat a 20 s commission rate) or employs its 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% b. The agents' commission rate is increased to 20%. c. The company employs its own sales force. Use income before income toxes in your operating leverage computation. Complete this question by entering your answers in the tabs below. Complte Pitman Company's breakeven point in dollar sales for next year assuming: (Round CM ratio to I decimal places ind fingl onwwers to the neareat dolar amount:)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Principles Of Auditing And Other Assurance Services

Authors: Ray Whittington, Kurt Pany

22nd Edition

126059808X, 978-1260598087

More Books

Students also viewed these Accounting questions

Question

Give three examples of business needs for a system.

Answered: 1 week ago

Question

What kinds of communication help sustain long-distance romances?

Answered: 1 week ago