Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales $ 20,200,000 Manufacturing expenses:

Variable $ 7,900,000 Fixed overhead 2,900,000

Gross margin 9,400,000

Selling and administrative expenses: Commissions to agents 4,040,000 Fixed marketing expenses 260,000* Fixed administrative expenses 2,500,000 6,800,000 Net operating income $ 2,600,000 Fixed interest expenses 680,000 Income before income taxes 1,920,000 Income taxes (25%) 480,000 Net income 1,440,000

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The breakdown of the $4,040,000 cost follows:

Salaries:
Sales manager	$	240,000
Salespersons		1,300,000
Travel and entertainment		960,000
Advertising		1,540,000
Total	$	4,040,000

Required:

1.

Compute Pittman Companys break-even point in dollar sales for next year assuming: (Enter your answer in whole dollars and not in thousands. Round CM ratio to 3 decimal places and final answer to the nearest dollar amount.)

a.	The agents commission rate remains unchanged at 20%.

b.	The agents commission rate is increased to 25%.

c.	The company employs its own sales force.

2. Assume that Pittman Company decides to continue selling through agents and pays the 25% commission rate. Determine the volume of sales that would be required to generate the same net income as contained in the budgeted income statement for next year.

3.	Determine the volume of sales at which net income would be equal regardless of whether Pittman Company sells through agents (at a 25% commission rate) or employs its own sales force.

4.	Compute the degree of operating leverage that the company would expect to have on December 31 at the end of next year assuming:

a.	The agents commission rate remains unchanged at 20%. (Round your answer to 2 decimal places.)

b.	The agents commission rate is increased to 25%. (Round your answer to 2 decimal places.)

c.	The company employs its own sales force. (Round your answer to 2 decimal places.)