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

Pittman 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 commission of 15% of selling price for all items sold.

Karen, Pittmans controller just prepared the companys budgeted income statement for next year. The statement follows:

PITTMAN COMPANY

BUDGETED INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2017

SALES

$16,000,000

MANUFACTURING COSTS:

VARIABLE

$7,200,000

FIXED

2,340,000

9,540,000

GROSS MARGIN

6,460,000

SELLING & ADMIN COSTS:

COMMISSION TO AGENTS

2,400,000

FIXED MARKETING COSTS

120,000*

FIXED ADMIN COSTS

1,800,000

4,320,000

NET OPERATING INCOME

2,140,000

*All depreciation on storage facilities.

As Karen handed the statement to Mitt Romney, Pittmans president, she commented, I used the agents 15% commission rate in completing the statement. But weve just learned that the agents refuse to handle selling our product next year unless we increase the commission rate to 20%."

Mitt replied How can they possibly defend a 20% commission rate? And I say its time we fire those guys and get our own sales force.

Karen said We can hire our own sales staff and pay them 7.5% commission, along with a small salary. Of course, we would have to handle all promotion costs too. We figure our fixed costs would increase by $2,500,000 per year.

The breakdown of the $2,500,000 cost figure is as follows:

Salaries:

Sales manager $ 100,000

Salespersons 700,000

Travel and Entertainment 400,000

Advertising 1,300,000

Total $2,500,000

Required:

Compute Pittmans break-even point in sales dollars for next year assuming:

that the agents commission rate remains unchanged at 15%

that the agents commission rate is increased to 20%

that the company employs its own sales force

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