Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own rathe relies completely on independent sales agents to market its products. These a are paid a sales commission of 14% for all items sold. Barbara Cheney, Pittman's controller, has just prepared the company's budgeted income statement for next year. The statement follows Pittman Company Budgeted Income Statement For the Year Ended December 3 Sales 18,400,000 Manufacturing expenses: Variable 7,600,000 Fixed overhead 2,660,000 10.260.000 Gross margin 8,140,000 Selling and administrative expenses Commissions to agents 2,576,000 Fixed marketing expenses 200.000 Fixed administrative expenses 2,200,000 4,976,000 Net operating income 3,164,000 620,000 Fixed interest expenses Income before income taxes 2,544,000 Income taxes (20 508.800 Net income 2,035,200 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 14% commission rate in completing these statements, but we've just learned that hey refuse to handle our products next year unless we increase the commission rate to 19% "That's the last straw," Karl replied angrily. Those agents have been demanding more and more, and me they've gone too far How can they possibly defend a 19% 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 it's just plain robbery, retorted Karl "And I also say it's time we dumped those guys and got ou 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 8.3 commission to their own salespeople, along with a small salary Of course, we would have to handle a promotion costs, too. We figure our fixed expenses would increase by $2,576,000 per year, but that would be more than offset by the $3.496,000 (19% x $18,400,000) that we would avoid on agents' commissions The breakdown of the S2,576.000 cost follows Salaries Sales manager 180,000 Salespersons 1.000.000 720,000 Travel and entertainment Advertising 676.000 Total $2,576,000 "Super," replied Karl "And I noticed that the $2.576.000 is just what we're paying the agents under the old 14% commission rate. It's even better than that," explained Barbara. We can actually save $115,000 a year because that's what we're having to pay the auditing firm now to check out the agents' reports. So our overal administrative costs would be les "Pull all of these numbers together and we'll show them to the executive committee tomorrow' s 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: (Enter your answer in whole dollars and no housands. Round CM ratio to 3 decimal places and final answer to the nearest dollar amount.) a. The agents' commission rate remains unchanged at 14 reak-even oint in dollar sales
