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 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:

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%. 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. Several companies we know about pay a 7.5% commission to their own salespeople, alone with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fixed expenses would increase by $2,400,000 per year, but that would be more than offset by the $3,200,000 (20% X 16,000,000) that we would avoid on agents' commissions.

The breakdown of the $2,400000 cost follows:

They noticed that the $2,400,000 equals what we're paying the agents under the old 15% commission rate. We can actually save $75,000 a year because that's what we're paying our auditors to check out the agents' reports. So our overall administrative expenses would be less.

1. Compute Pittman Company's break-even point in dollar sales for next year assuming:

a. The agent's commission rate remain unchanged at 15%.

b. The agents' commission rate is increased to 20%.

c. The company employs its own sales force.

Pittman Company Budgeted Income Statement For the Year Ended December 31 $ 16,000,000 $7,200,000 2,340,000 9,540,000 6,460,000 $2,400,000 Sales Manufacturing expenses: Variable Fixed overhead Gross margin Selling and administrative expenses: Commissions to agents Fixed marketing expenses Fixed administrative expenses Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) Net income 120,000* 1,800,000 4,320,000 2,140,000 540,000 1,600,000 480,000 1,120,000 $