Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its www: 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. Pittman's controller, 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 $16.000.000 $7.200,000 2.340,000 9.540.000 6.400.000 Sales Manufacturing expenses Variable Fixed Grosmarin Selling and administrative expenses Sales como Fixed a pens Find dinstvene Operating income Interested Income before income tax Income 2.400.000 120.000 1.800,000 4.130,000 2.100,000 140.000 1.000.000 450.000 T Q "We've already worked them up." said Barbara, "Several companies we know about pay a 7.5% 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 $2.400.000 per year, but that would be more than offset by the $3,200,000 (20% * $ 16,000,000) that we would avoid on agents" commissions." The breakdown of the $2,400,000 cost follows: . Salaries Sales manager Salespersons Travel and entertainment Advertising Total S100.000 600.000 400,000 1.300.000 $2,400,000 "Super" replied Kart. And I noticed that the 52,400.000 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 $75.000 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'll show them to the executive committee tomorrow." said Katt. With the approval of the committee, we can move on the matter immediately JA G Q Required: 1. Compute Pittman Company's break even point in dollar sales for next year assuming: a The agents commission rate remains unchanged at 15%. b. The agents commission rate is increased to 20%. c. The company employs its own sales force. 2. Assume that Pittman Company decides to contine 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 net 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 a The agents commission rate remains unchanged at 15%. The agents commission rate is increased to 20% e The company employs its own sales force Use income before income taxes in your operating leverage computation 5. Based on the data in (1) through (4) above, make a recommendation as to whether the company should continue to use sales apentsat a 20% commission rate) or employ its own salesforce. Give reasons for your