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Pitoman Company is a small but growing manufacturer of telecommunications part. The company has no sales force of its own rather. It rolles corrpletely on
Pitoman Company is a small but growing manufacturer of telecommunications part. The company has no sales force of its own rather. It rolles corrpletely on Independerit sales agents to market its products. These cits are pak a sales commodion of 15% for a items soldi. Barbwa Cheney, Pittman's controler, has just prepared the company's budgeted Income statement for next year as follows. Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales $22,000,000 Manufacturing expenses: Variable $9,900, Fixed overhead 3,680,000 12,980, eee Gross margin 9,620,000 Selling and administrative expenses: Commissions to agents 3,300,eee Fixed marketing expenses 154,00* Fixed administrative expenses 2,040,000 5,494,000 Net operating income 3,526,000 Fixed interest expenses 770,000 Income before income taxes 2,756,000 Income taxes (30%) 826,800 Net income $ 1,929,200 "Primarily depreciation on storage facilities. As Barbara handed the statement to Karl Vecci, Pittman's president, she commented, "Twent 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." Karl 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 say post plain robbery." retorted Karl. "And I also say it's time we dumped those guys and got our own salesforce. Can you go your people to work up some cost figures for us to look at Wove arody worked them up." said Barbara, "Several companies we know about a 7.5% commission to their own blespeople. along with a small salary. Of course, we would have to handle all promotion costat We figure out fixed expenses would increase by $3,300.000 per year, but that would be more than offset by the $4,400.000 (201 $22.000.000 that we would avoid on geris commissons The breakdown of the $3.300.000 cosifolows You slapped the question in The breakdown of the $3,300,000 cost follows: Salaries Sales Manager $ 137. See Salespersons 325.000 Travel and entertainment 550,00 Advertising 1,787,500 Total $3,300,000 "Super" replied Karl And I noticed that the $3,300,000 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 $101.200 a year because that's what we're paying our auditors to check out the agents reports. So our overall administrative expenses would be less." "Pull all of these numbers together and we 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 2. The agents commission rate remains uncharged at 15% b. The agents commission rate is increased to 10% c. The company employs its own salos 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 not Income would be equal regardless of whether Pittman Company sells through agents at a 20% 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: 4. The agents commission rate remains unchanged at 15% b. The agents commission rate is increased to 20% The company employs its own salesforce. Use Income before income taxes in your operating leverage computation Complete this question by entering your answers in the tabs below. Compute Pittman Company's break-even point in dollar sales for next year assuring (Round C and in answers to the neares Ballar among o to 3eme places
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