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. The statement follows:
Pmrrlan (Jumper-[y Budgeted Income Statement Fcr the Year Ended Deanher 31 Saies $10,700,000 Menuaclun' ng expenses: Variable $ 7,631,000 Fixed overhead 2,700,000 10,350,000 Gross margin 8,350,000 Sailing and administrative expenses: Commissions in agents 2,305,000 Fixed marketing expenses 210,000' Fixed edministraiive expenses 2,2m,oou 5,265,000 Net opereiing income 9: 3,085,000 Fixed interesl expenses 630,000 Income before income taxes 2,455,000 Income taxes {25%) 613,750 Net income 1,841,250 i 'Primarilv deoreaiaiion on sinraae Facilities. As Barbara handed the statementtn Karl Vemi. 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 inaease the oommisa'on 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 delend a 20% oommimion rale'?'I 'They claim that aer paying for advertising, travel, and the other posts of promotion, there's nothing tell over for prot,' replied Barbara. "I say it's just plain robbery," retortred Karl. "And I also say it's time we dumped those guys and got our own sales toree. Can you getyour people to work up some cost gures for us to look at?" "We've already worked them up,\" said Barbara l'Several oompanieswe know aboutpay a 8.4% commission to their own salespeople, along with a small salary. Ofoourse, we would have to handle all promotion costs, too. We gure our xed expenses would increase by $2,805,000 per year, but that would be more than omt by the $3,740,000 (20% K $18,?00,000) that we would avoid an agents' mmmiions.' The breakde of the $2,805,000 cost follows: Salaries: Sales manager S 190,000 Saiespersons 1,050,000 Travel and entertainment 760,000 Advertising 305,000 Total $2,305,000 [ '5uper,' replied Karl. \"And I noticed that the $2.805,000 is just what we're paying the agents under the old 15% commission rate.\" 'lt's even better than that,\" explained Barbara. \"We can actually save $120,000 a year beoause that's what we're having to pay the auditing rm now to check out the agentsI reports. So our overall administrative costs would be less.\" "Pull all ofthese numbers together and we'll show them to the exemtive committee tomorrow,\" said Karl. \"With the approval oftne committee. we can move on the matter immediately.\" Required: 1. Compute Pittman Company's hrealreven point in dollar sales For next year assuming: (Enter your answer in whole dollars and not in thousands. Round CM ratio to 3 decimal places and final answer to the nearest dollar amount.) Raqulrud: 1. Compute Phiman Company's breakeven point in dollar sales for new! year assuming: (Enter your answer in whole chllars and no! in thousands. Round CM ratio to 3 doclmal plans and final anmr to the nnmt dollar amount] a. The agents' mmmission rate remains unchanged 81 15%. h. The agents' commission rate is increased in 20%. r; The mmpany employs its own sales force
