Question

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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: Pittman Company Budgeted Income Statement For the Year Ended December 31 $16,000,000 $7,200,000 2,340,000 9,540,000 6,460,000 Sales ...... Manufacturing expenses: Variable ........ Fixed overhead ......................... Gross margin .............. Selling and administrative expenses: Commissions to agents .......... Fixed marketing expenses .......... Fixed administrative expenses....... Net operating income Fixed interest expenses ............. Income before income taxes ........ Income taxes (30%)............... Net income ....... "Primarily depreciation on storage facilities. 2,400,000 120,000 1,800,000 4,320,000 2,140,000 540,000 1,600,000 480,000 $ 1,120,000

Answer 1

The data in the statements below are in thousands.

	15% Commission						20% Commission						Own Sales Force
Sales	$	16000		100	%		$	16000		100	%		$	16000		100.0	%
Variable expenses:
Manufacturing		7200						7200						7200
Commissions (15%, 20%, 7.5%)		2400						3200						1200
Total variable expenses		9600		60.0	%			10400		65.0	%			8400		52.5	%
Contribution margin		6400		40.0	%			5600		35.0	%			7600		47.5	%
Fixed expenses:
Manufacturing overhead		2340						2340						2340
Marketing		120						120						2520
Administrative		1800						1800						1725
Interest		540						540						540
Total fixed expenses		4800						4800						7125
Income before income taxes		1600						800						475
Income taxes (30%)		480						240						142.50
Net income	$	1120					$	560					$	332.50

120000+2400000 = 2520000 1800000-75000 = 1725000

Part 1 A

Dollar sales to break even= fixed expenses/CM ratio = 4800000/0.400 = $12000000

Part 1 B

Dollar sales to break even= fixed expenses/CM ratio = 4800000/0.350 = $13714286

Part 1 C

Dollar sales to break even= fixed expenses/CM ratio = 7125000/0.475 = $15000000

Part 2

In order to generate a $1742300 net income, the company must generate $2489000 in income before taxes

Dollar sales to attain target= target income before taxes + fixed expenses / contribution margin ratio = (1600000+4800000)/ 0.350 = $18285714

Part 3

X = total sales revenue

0.650x+4800000 = 0.525x+7125000

0.125x =2325000

X = $18600000

Part 4

	15% Commission	20% Commission	Own Sales Force
Contribution margin (Part 1) (a)	6400000	5600000	7600000
Income before taxes (Part 1) (b)	1600000	800000	475000
Degree of operating leverage: (a) ÷ (b)	4.00	7.00	16.00

Part 5

The company make use of Own Sales Force as it give higher contribution margin and higher DOL.