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 311 Manufacturing expenses: Variable Fixed overhead Gross margin Selling and administrative expenses: Commissions to agents. Fixed marketing expenses $ 19,500,000 $ 8,775,000 2,730,000 11,505,000 7,995,000 2,925,000 136,500 Fixed administrative expenses 1,940,000 5,001,500 Net operating inconel Fixed interest expenses Income before income taxes Income taxes (30%) 2,993,500 682,500 2,311,000 693,300 $ 1,617,700 Net incone "Primarily depreciation on storage facilities. 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.