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: $ 19,000,000 Variable Fixed overhead $ 8,550,000 2,660,000 11,210,000 Gross margin 7,790,000 Selling and administrative expenses: Commissions to agents 2,850,000 Fixed marketing expenses Fixed administrative expenses 133,000+ 1,920,000 4,903,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) Net income Primarily depreciation on storage facilities. 2,887,000 665,000 2,222,000 666,600 $ 1,555,400 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?"