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 as follows: $22,500,000 pittman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses Variable $10,125,000 Fixed overhead 3,150,000 Gross margin Selling and administrative expenses Commissions to agents 3,375,000 Pixed marketing expenses 157,500 Fixed administrative expenses 2,060,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (305) Net income 13,275,000 9,225,000 5,592,500 3,632,500 787.500 2,845,000 953,500 $ 1,991,500 As Barbara handed the statement to Karl Vecci, Pittman's president, she commented, "I went ahead ar the agents' 15% commission rate in completing these statements, but we've just learned that they refu handle our products next year unless we increase the commission rate to 20%." "That's the last straw." Karl replied angrily. "Those agents have been demanding more and more, and t 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 let profit," replied Barbara. " say it's just plain robbery," retorted Karl. "And I also say it's time we dumped those guys and got our ov force. Can you get your people to work up some cost figures for us to look at?" I "We've already worked them up," said Barbara. "Several companies we know about pay a 7.5% commissi their own salespeople, along with a small salary. Of course, we would have to handle all promotion costs, We figure our fixed expenses would increase by $3,375,000 per year, but that would be more than offset $4,500,000 (20% * $22,500,000) that we would avoid on agents' commissions." The breakdown of the $3,375,000 cost follows: Salaries: Sales manager Salespersons Travel and entertainment Advertising Total $ 140,625 843,750 562,500 1,828,125 $3,375,000