Question
Weve already worked them up, said Barbara. Several companies we know about pay a 7.5% commission to their own salespeople, along with a small salary.
Weve already worked them up, said Barbara. Several companies 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 our fixed expenses would increase by $3,600,000 per year, but that would be more than offset by the $4,800,000 (20% $24,000,000) that we would avoid on agents commissions.
The breakdown of the $3,600,000 cost follows:
Salaries: | |
---|---|
Sales manager | $ 150,000 |
Salespersons | 900,000 |
Travel and entertainment | 600,000 |
Advertising | 1,950,000 |
Total | $ 3,600,000 |
Super, replied Karl. And I noticed that the $3,600,000 equals what were paying the agents under the old 15% commission rate.
Its even better than that, explained Barbara. We can actually save $110,400 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.
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