Super, replied Karl. And I noticed that the $3,825,000 equals what were paying the agents under the old 15% commission rate.

Its even better than that, explained Barbara. We can actually save $117,300 a year because thats what were paying our auditors to check out the agents reports. So our overall administrative expenses 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.

Required:

1. Compute Pittman Companys 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.

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: 525, 500,00 Pittman Company Quageted Income Statement For the Year Ended December 31 Sales Manufacturing expenses Variable 511,475,000 Fixed overhead 3,570,000 Gross wargis Selling and administrative expenses Comissions to agents Fixed Darketing expenses 178,500 Fixed administrative expenses Net operating incos Fixed Interest expenses Incone before income taxes Income taxes (301) Net Income 15.045,000 10,455,000 5,133,500 4,271,500 122.500 3, 379.000 "Primarily depreciation on storage facilities As Barbara handed the statement to Kart Veccs, Portman's president, she commented Twent 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 stran. Kort replied angry "Those agents have been demanding more and more, and the time they ve gone 100 for How can they possibly defend a 20% commission rote? "They claim that after paying for advertising, travel and the other costs of promotion, theres nothing left over for prote" replied Barbora "I say it's just plain robbery." resorted Kon "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 cold Barbora "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 coses, too we figure our foed expenses would increase by $3,825,000 per year, but that would be more than offset by the $100.000 (20% $25.500.000) that we would avoid on agents commissions The breakdown of the $3.825.000 cost follows 1 159, Salaries Sales ante Sapers Travel and stertainment Advertising Total "Super replied Kon "And I noticed that the $3.825.000 equals what we're paying the agents under the old 15