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 sales commission of 15% for all items sold. Barbara Cheney, Pittmans controller, has just prepared the companys budgeted income statement for next year. The statement follows: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales $ 16,000,000 Manufacturing expenses: Variable $ 7,200,000 Fixed overhead 2,340,000 9,540,000 Gross margin 6,460,000 Selling and administrative expenses: Commissions to agents 2,400,000 Fixed marketing expenses 120,000* Fixed administrative expenses 1,800,000 4,320,000 Net operating income 2,140,000 Fixed interest expenses 540,000 Income before income taxes 1,600,000 Income taxes (20%) 480,000 Net income $ 1,120,000 ________________________________________

I say its just plain robbery, retorted Karl. And I also say its time we dumped those guys and got our own sales force. Can you get your people to work up some cost figures for us to look at?

Weve already worked them up, said Barbara. Several companies we know about pay a 6.3% commission to their own salespeople, along with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fixed expenses would increase by $3,042,000 per year, but that would be more than offset by the $3,887,000 (23% $16,900,000) that we would avoid on agents commissions.

The breakdown of the $2,400,000 cost follows:

Salaries:
Sales manager	$	100,000
Salespersons		600,000
Travel and entertainment		400,000
Advertising		1,300,000
Total	$	2,400,000

Super, replied Karl. And I noticed that the $2,400,000 is just what were paying the agents under the old 15% commission rate.

Its even better than that, explained Barbara. We can actually save $75,000 a year because thats what were having to pay the auditing firm now to check out the agents reports. So our overall administrative expenses would be less.

Pull all of these numbers together and well show them to the executive committee tomorrow, said Karl. With the approval of the committee, we can move on the matter immediately.

Compute Pittman Companys break-even point in dollars sales for next year assuming

The agents commission rate remains unchanged at 15%

The agents commission rate is increased to 20%

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 volume of sales that would be required to generat the sme net income as contained in the buddgeted income statement for next year.
3. Determine the volume of sales of which net income would be equal regardless of whether Pittman Company sells through agents at 20% commission and employs its own workforce.
4. Compute the degree of operating leverage that the company would expect to have at December 31 assuming the agents commission rate remains 15%, the agents commission is increased to 20%, the company employs its own sales force
5. Based on the data requirements 1-4 above, make a recommendation as to whether the company should continue to use sales agents at 20% commission or employ their own sales force.