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 17 for all items sold Barbara Cheney, Pittmans controller, has just prepared the companys budgeted income statement for next year The statement follows Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales $16,100,000 Manufacturing costs Variable $7,100,000 Fixed overhead 2,290,000 9,390,000 Gross margin 6,710,000 Selling and administrative costs Commissions to agents 2,415,000 Fixed marketing costs 114,000 Fixed administrative costs 1,670,000 4,199,000 Net operating income 2,511,000 Fixed interest cost 522,000 Income before income taxes 1,989,000 Income taxes (30 ) 596,700 Net income $1,392,300 Primarily depreciation on storage facilities As Barbara handed the statement to Karl Vecci, Pittmans president, she commented, I went ahead and used the agents 15 commission rate in completing these statements, but weve just learned that they refuse to handle our products next year unless we increase the commission rate to 20 Thats the last straw, Karl replied angrily Those agents have been demanding more and more, and this time theyve 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, theres nothing left over for profit, replied Barbara I say its just plain robbery, retorted Karl And I also say its 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 Weve 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 costs would increase by $2,415,000 per year, but that would be more than offset by the $3,220,000 (20 $16,100,000) that we would avoid on agents commissions The breakdown of the $2,415,000 cost follows Salaries Sales manager $102,000 Salespersons 611,000 Travel and entertainment 406,000 Advertising 1,296,000 Total $2,415,000 Super, replied Karl And I noticed that the $2,415,000 is just what were paying the agents under the old 15 commission rate Its even better than that, explained Barbara We can actually save $76,000 a year because thats what were having to pay the auditing firm now to check out the agents reports So our overall administrative costs would be less Pull all of these numbers together and well show them to the executive committee tomorrow, said Karl With the approval of the committee, we can move on the matter immediately Requirement 1 Compute Pittman Companys break even point in sales dollars for next year assuming (a) The agents commission rate remains unchanged at 15 (Round contribution ratio ( ) to 3 decimal places, e g , 1234 as 123 or 12 3 Round your answer to the nearest dollar amount Omit the $ sign in your response ) (b) The agents commission rate is increased to 20 (Round contribution ratio ( ) to 3 decimal places, e g , 1234 as 123 or 12 3 Round your answer to the nearest dollar amount Omit the $ sign in your response ) The company employs its own sales force (Round contribution ratio ( ) to 3 decimal places, e g , 1234 as 123 or 12 3 Round your answer to the nearest dollar amount Omit the $ sign in your response ) Requirement 2 Assume that Pittman Company decides to continue selling through agents and pays the 20 commission rate Determine the volume of sales that would be required to generate the same net income as contained in the budgeted income statement for next year (Round contribution ratio ( ) to 3 decimal places, e g , 1234 as 123 or 12 3 Round your answer to the nearest dollar amount Omit the $ sign in your response ) Determine the volume of 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 (Round contribution ratio ( ) to 3 decimal places, e g , 1234 as 123 or 12 3 Round your answer to the nearest dollar amount Omit the $ sign in your response ) Requirement 4 Compute the degree of operating leverage that the company would expect to have on December 31 at the end of next year assuming (Round your answers to 2 decimal places )

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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

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 17% for all items sold.

Barbara Cheney, Pittmans controller, has just prepared the companys budgeted income statement for next year. The statement follows:

Pittman Company Budgeted Income Statement For the Year Ended December 31
Sales		$16,100,000
Manufacturing costs:
Variable	$7,100,000
Fixed overhead	2,290,000	9,390,000
Gross margin		6,710,000
Selling and administrative costs:
Commissions to agents	2,415,000
Fixed marketing costs	114,000*
Fixed administrative costs	1,670,000	4,199,000
Net operating income		2,511,000
Fixed interest cost		522,000
Income before income taxes		1,989,000
Income taxes (30%)		596,700
Net income		$1,392,300

*Primarily depreciation on storage facilities.

As Barbara handed the statement to Karl Vecci, Pittmans president, she commented, I went ahead and used the agents 15% commission rate in completing these statements, but weve just learned that they refuse to handle our products next year unless we increase the commission rate to 20%.

Thats the last straw, Karl replied angrily. Those agents have been demanding more and more, and this time theyve 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, theres nothing left over for profit, replied Barbara.

I say its just plain robbery, retorted Karl. And I also say its 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?

Weve 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 costs would increase by $2,415,000 per year, but that would be more than offset by the $3,220,000 (20% $16,100,000) that we would avoid on agents commissions.

The breakdown of the $2,415,000 cost follows:


Salaries:
Sales manager	$102,000
Salespersons	611,000
Travel and entertainment	406,000
Advertising	1,296,000
Total	$2,415,000

Super, replied Karl. And I noticed that the $2,415,000 is just what were paying the agents under the old 15% commission rate.

Its even better than that, explained Barbara. We can actually save $76,000 a year because thats what were having to pay the auditing firm now to check out the agents reports. So our overall administrative costs would be less.

Pull all of these numbers together and well show them to the executive committee tomorrow, said Karl. With the approval of the committee, we can move on the matter immediately.

Requirement 1:

Compute Pittman Companys break-even point in sales dollars for next year assuming:

(a)

The agents commission rate remains unchanged at 15%. (Round contribution ratio (%) to 3 decimal places, e.g., .1234 as .123 or 12.3%. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)

(b)

The agents commission rate is increased to 20%. (Round contribution ratio (%) to 3 decimal places, e.g., .1234 as .123 or 12.3%. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)

The company employs its own sales force. (Round contribution ratio (%) to 3 decimal places, e.g., .1234 as .123 or 12.3%. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)

Requirement 2:

Assume that Pittman Company decides to continue selling through agents and pays the 20% commission rate. Determine the volume of sales that would be required to generate the same net income as contained in the budgeted income statement for next year. (Round contribution ratio (%) to 3 decimal places, e.g., .1234 as .123 or 12.3%. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)

Determine the volume of 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. (Round contribution ratio (%) to 3 decimal places, e.g., .1234 as .123 or 12.3%. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)

Requirement 4:

Compute the degree of operating leverage that the company would expect to have on December 31 at the end of next year assuming:(Round your answers to 2 decimal places.)