Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

image text in transcribed

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, Pittman's controller, has just prepared the company's budgeted income statement for next year as follows: Sales Pittman Company Budgeted Income Statement For the Year Ended December 31 Manufacturing expenses: Variable Fixed overhead Gross margin Selling and administrative expenses: Commissions to agents. Fixed marketing expenses $ 22,500,000 $ 10,125,000 3,150,000 13,275,000 9,225,000 Fixed administrative expenses 3,375,000 157,500 2,060,000 5,592,500 Net operating income. Fixed interest expenses Income before income taxes Income taxes (30%) Net income "Primarily depreciation on storage facilities. 3,632,500 787,500 2,845,000 853,500 $ 1,991,500 As Barbara handed the statement to Karl Vecci, Pittman's president, she commented, "I went ahead and used the agents' 15% commission rate in completing these statements, but we've just learned that they refuse to handle our products next year unless we increase the commission rate to 20%." "That's the last straw," Karl replied angrily. "Those agents have been demanding more and more, and this time they've gone too far. How can they possibly defend a 20% 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. "I say it's just plain robbery," retorted Karl. "And I also say it's 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?" "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 $3,375,000 per year, but that would be more than offset by the $4,500,000 (20% $22,500,000) that we would avoid on agents commissions." The breakdown of the $3,375,000 cost follows: Salaries: Sales manager Salespersons Travel and entertainment Advertising Total $ 140,625 843,750 562,500 1,828,125 $ 3,375,000 "Super" replied Karl. "And I noticed that the $3,375,000 equals what we're paying the agents under the old 15% commission rate."

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting Information Systems The Crossroads of Accounting & IT

Authors: Donna Kay, Ali Ovlia

2nd Edition

132991322, 978-0132991322

More Books

Students also viewed these Accounting questions

Question

c++ Use heap ADT to implement priority queue ADT.

Answered: 1 week ago