Question

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: $ 17,000,000 10,030,000 6,970,000 Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses: Variable $ 7,650,000 Fixed overhead 2,380,000 Gross margin Selling and administrative expenses: Commissions to agents 2,550,000 Fixed marketing expenses 119,000* Fixed administrative expenses 1,840,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) Net income 4,509,000 2,461,000 595,000 1,866,000 559,800 1,306,200 $ *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%."

Answer 1

1	15% Commission	%	20% Commission		Own sales force
Sales	17,000,000	100%	17,000,000	100%	17,000,000	100%
Variable expenses
Manufacturing	7,650,000		7,650,000		7,650,000
Commission	2,550,000	10200000/17000000	3,400,000		1,275,000
Total Variable Expenses	10,200,000	60%	11,050,000	65%	8,925,000	53%
Contribution Margin	6,800,000	40%	5,950,000	35%	8,075,000	48%
Fixed expenses
Manufacturing overhead	2,380,000		2,380,000		2,380,000
Marketing	119,000		119,000		2,669,000
Administrative	1,840,000		1,840,000		1,761,800
Interest	595,000		595,000		595,000
Total Fixed Expense	4,934,000		4,934,000		7,405,800
Income before income taxes	1,866,000		1,016,000		669,200
Income Taxes	559,800		304,800		200,760
Net Income	1,306,200		711,200		468,440
**119000+2550000
***1840000-78200

1
a	4934000/.4		4934000/.35		7405800/.48
	12,335,000		14,097,143		15,591,158

2
Dollar sales to attain target = Target income before taxes + Fixed expenses CM ratio
= 1866000+4934000 / .35
15963143

3
X = Total sales revenue
0.65 X + $4,934,000 = 0.53 X + $7405800
= 0.12 X = 2471800	20,598,333

4
	15% Commission	20% Commission	Own sales force
Contribution margin	6,800,000	5,950,000	8,075,000
Income before taxes	1,866,000	1,016,000	669,200
Degree of operating leverage	3.64	5.86	12.07