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.

Pittman Company
Budgeted Income Statement
For the Year Ended December 31
Sales		$23,000,000
Manufacturing expenses:
Variable	$10,350,000
Fixed overhead	3,220,000	13,570,000
Gross margin		9,430,000
Selling and administrative expenses:
Commissions to agents( this times %)	3,450,000
Fixed marketing expenses	161,000
Fixed administrative expenses	2,080,000	5,691,000
Net operating income		3,739,000
Fixed interest expenses		805,000
Income before income taxes		2,934,000
Income taxes (30%)		880,200
Net income		$2,053,800

The breakdown of the $3,450,000 cost follows:
Salaries:
Sales manager	$143,750
Salespersons	862,500
Travel and entertainment	575,000
Advertising	1,868,750
Total	$3,450,000

1. Compute Pittman Companys break-even point in dollar sales for next year assuming: (Round CM ratio to 3 decimal places and final answers to the nearest dollar amount.)
a. The agents commission rate remains unchanged at 15%.		?????
b. The agents commission rate is increased to 20%.		??????
c. The company employs its own sales force.		?????

2. Assume that Pittman Company decides to continue selling through agents and pays the 20% commission rate. Determine the dollar sales that would be required to generate the same net income as contained in the budgeted income statement for next year. (Round CM ratio to 3 decimal places and final answer to the nearest dollar amount.)

Volume of Sales in dollars = ???

3. Determine the dollar 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. (Do not round intermediate calculations.)

Volume of Sales in dollars = ???

4. Compute the degree of operating leverage that the company would expect to have at the end of next year assuming: (Use income before income taxes in your operating leverage computation.) (Round your answers to 2 decimal places.)

	Degree of Operating Leverage
a. The agents commission rate remains unchanged at 15%. ?????
b. The agents commission rate is increased to 20%.	????
c. The company employs its own sales force.	????

Please give detailed notes of calculations per part. Thank you!

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 ncrease 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 our people to work up some cost figures for us to look at?" "We've already worked them up," sald Barbara. "Several companles 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 cur fixed expenses would increase by $3,450,000 per year, but that would be more than offset by the $4,600,000(20%$23,000,000) that we would avoid on agents' "Super," replied Karl. "And I noticed that the $3,450,000 equals what we're paying the agents under the old 15% commission rate." "It's even better than that," explained Barbara. "We can actually save $105,800 a year because that's what we're paying our auditors to check out the agents" reports. So our overall adrrinistrative expenses would be less." "Pull all of these numbers together and we'll show them to the executive committee tomorrow," said Karl. "With the approval of the committee, we can move on the matter immediately