Saved $26,000,000 that we would avold on agents' commissions The breakdown of the $3,900,000 cost follows: Salaries: Sales manager Salespersons Travel and entertainment Advertising Total $ 162,500 975,000 650,000 2.112,500 $3,900,000 "Super" replied Karl. "And I noticed that the $3,900,000 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 $119,600 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." "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 Required: 1. Compute Pittman Company's break-even point in dollar sales for next year assuming: 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. 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. 4. Compute the degree of operating leverage that the company would expect to have at the end of next year assuming 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 Use income before income taxes in your operating leverage computation Complete this question by entering your answers in the tabs below. Required Required Required Required Compute Pittman Company's 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.) Break-Even Point The agents' commission rate remains unchanged at 15% The agents' commission rate is increased to 20% c. The company employs its own sales force Required Required 2 > 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 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: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales $ 26,000,000 Manufacturing expenses: Variable $11,700,000 Fixed overhead _3,640,000 15,340,000 Gross margin 10,660,000 Selling and administrative expensest Commissions to 3,900,000 agents Pixed marketing 182,000 expenses Fixed administrative 2,200,000 6,282,000 expenses Net operating income 4,378,000 Fixed interest expenses 910.000 Income before income taxes 3,468,000 Income taxes (301) 1,040,400 Net income $ 2,427,600 *Primarily depreciation on storage facilities 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 increase the commission rate to 20%." "That's the last straw." Kart 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 "1 say it's just plain bbery," retorted kart. "And I also say it's 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?" "We've already worked them up," said Barbara, "Several companies we know about pay a 75% 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 expenses would increase by $3,900.000 per year, but that would be more than offset by the $5.200.000 201 $26.000.000) that we would avoid on agents' commissions." The breakdown of the $3,900,000 cost follows: Salaries: Sales manager Salespersona Travel and entertainment Advertising Total $ 162,500 975,000 650,000 2,112.500 $3,900,000 Required Required Required Required Assume that Pittman Corhany 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.) Show less Volume of sales (in dollars) Required Required Required Required 34 Determine the dollar sales at which net income would be equal regardless of wh Pittman Company sells through agents (at a 20% commission rate) or employs its sales force. (Do not round intermediate calculations.) Show les: Volume of sales in dollars) Compute the degree of operating everage 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.) Show less Degree of Operating Leverage The agents' commission rate remains unchanged at 15%. The agents commission rate is increased to 20% The company employs its own sales force
