| 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.) | | | | | | | | |
