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: $ 21,000,000 12,390,000 8,610,000 Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses: Variable $ 9,450,000 Fixed overhead 2,940,000 Gross margin Selling and administrative expenses: Commissions to agents 3,150,000 Fixed marketing expenses 147,000* Fixed administrative expenses 2,000,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) Net income 5,297,000 3,313,000 735,000 2,578,000 773,400 $ 1,804,600 *Primarily depreciation on storage facilities.

Answer 1

a.	Break-even point in dollar sales						14,555,000
	BEP(dollar sales) =		fixed expense/contribution margin ratio
			Fixed cost				5,822,000
			Contribution margin				40.0%
b)	Break even point in dollar sales						16,634,286
c)	Break even point in dollar sales						18,685,053
2)	Voulme of sales (in dollars)						24,000,000
	(Target income before taxes +fixed expense)/contribution margin
3)	Voulme of Sales (in dollars)						24,427,200
	X =	total evenue
	.65 X + 5,822,000=		.525x +8,875,400
		0.125	x	=		3,053,400
			x =	24427200
4)
a)	Degree of operating leverage						3.26
b)	Degree of operating leverage						4.81
c)	Degree of operating leverage						9.07
	degree of operating leverage = contribution marging/income before taxes

Working notes

			15% comm		20% comm		7.5% comm
Sales			21,000,000	100%	21,000,000	100%	21,000,000	100%
Variable expenses:
manufacturing			9,450,000		9,450,000		9,450,000
comissions (15%;20%,7.5%)			3,150,000		4200000		1575000
total variable expense			12,600,000	60.0%	13,650,000	65.0%	11,025,000	52.5%
contribution margin			8,400,000	40.0%	7,350,000	35.0%	9,975,000	47.5%
fixed expenses
manufacturing overhead			2,940,000		2,940,000		2,940,000
marketing			147,000		147,000		3,297,000
administrative			2,000,000		2,000,000		1,903,400
interest			735,000		735,000		735,000
total fixed expense			5,822,000		5,822,000		8,875,400
income before income taxes			2,578,000		1,528,000		1,099,600
income taxes (30%)			773400		458400		329880
net income			1,804,600		1,069,600		769,720