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.

Building Your Skills Case (LO6-4, LO6-5, LO6-6) 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: $19,000,000 11,210,000 7,790,000 Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses: Variable $ 8,550,000 Fixed overhead 2,660,000 Gross margin Selling and administrative expenses: Commissions to agents 2,850,000 Fixed marketing expenses 133,000* Fixed administrative expenses 1,920,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) Net income 4,903,000 2,887,000 665,000 2,222,000 666,600 $ 1,555,400 *Primarily depreciation on storage facilities.

Answer 1

a.	Break-even point in dollar sales						13,445,000
	BEP(dollar sales) =		fixed expense/contribution margin ratio
			Fixed cost				5,378,000
			Contribution margin				40.0%
b)	Break even point in dollar sales						15,365,714
c)	Break even point in dollar sales						17,138,105
2)	Voulme of sales (in dollars)						21,714,286
	(Target income before taxes +fixed expense)/contribution margin
3)	Voulme of Sales (in dollars)						22,100,800
	X =	total evenue
	.65 X + 5,378,000=		.525x +8,140,600
		0.125	x	=		2,762,600
			x =	22100800
4)
a)	Degree of operating leverage						3.42
b)	Degree of operating leverage						5.23
c)	Degree of operating leverage						10.20
	degree of operating leverage = contribution marging/income before taxes

working

			15% comm		20% comm		7.5% comm
Sales			19,000,000	100%	19,000,000	100%	19,000,000	100%
Variable expenses:
manufacturing			8,550,000		8,550,000		8,550,000
comissions (15%;20%,7.5%)			2,850,000		3800000		1425000
total variable expense			11,400,000	60.0%	12,350,000	65.0%	9,975,000	52.5%
contribution margin			7,600,000	40.0%	6,650,000	35.0%	9,025,000	47.5%
fixed expenses
manufacturing overhead			2,660,000		2,660,000		2,660,000
marketing			133,000		133,000		2,983,000
administrative			1,920,000		1,920,000		1,832,600
interest			665,000		665,000		665,000
total fixed expense			5,378,000		5,378,000		8,140,600
income before income taxes			2,222,000		1,272,000		884,400
income taxes (30%)			666600		381600		265320
net income			1,555,400		890,400		619,080