Question

Check my work Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own rather, it relles 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: $ 26,000,000 15, 340,000 10,660,000 Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses: Variable $11,700, e Fixed overhead 3,640,000 Gross margin Selling and administrative expenses: Commissions to agents 3.900,oo Fixed marketing expenses 182.ee Fixed administrative expenses 2,200,000 Net operating Income Fixed Interest expenses Income before income taxes Income taxes (303) Net Income 6,282.000 4,378,000 910,000 3,468,000 1,040,400 2,427,600 $

Answer 1

Requirement 1 Computation of Break-even point Particulars Case (a) Commission rate at 15% Case (b) Case (c) Commission rate at 20% Own Sales Force (1) Fixed Costs Fixed Manufacturing OH Fixed Marketing expenses Fixed Selling OH Fixed Administrative expenses 36,40,000 1,02,000 36,40,000 1,02,000 36,40,000 1,02,000 39,00,000 20,80,400 (2200000-119600) 97,22,400 22,00,000 22,00,000 $ Total Fixed costs 59,42,000 $ 59,42,000 $ 2,60,00,000 $ 2,60,00,000 $ 2,60,00,000 (11) Contribution margin ratio Sales (-) Variable expenses Variable manufacturing OH Commission to agents $ $ $ -1,17,00,000 -39,00,000 (26000000*15%) 1,04,00,000 -1,17,00,000 -52,00,000 (26000000*20%) 91,00,000 -1,17,00,000 -19,50,000 (26000000*7.50%) 1,23,50,000 Contribution margin $ $ Contribution margin ratio (Contribution/Sales) 40% (10400000/26000000) 35% 48% (9100000/26000000) (10400000/26000000) $ $ (111) Break-even Point (in $) (Fixed Costs/Contribution margin ratio) 1,48,55,000 (5942000/40%) 1,69,77,143 (5942000/35%) 2,04,68,211 (5942000/40%)

Requirement 2 Assuming 20% commission rate, Fixed costs (+) Required Net Operating Income Required Contribution Contribution margin ratio (case b) Required Sales 59,42,000 43,78,000 1,03,20,000 35% 2,94,85,714 (10320000/35%) Requirement 3 I Own Sales Force 97,22,400 48% Fixed costs Contribution margin ratio $ Commission at 20% 59,42,000 $ 35% Difference 37,80,400 13% Indifference Point = Change in Fixed costs/Change in Contribution margin ratio Indifference Point = 3780400/13% = $ 30,243,200 Hence, at sales of $ 30,243,200; the net income is equal for both case b and case c. Requirement 4 Computation of Degree of Operating Leverage Particulars Case (a) Case (b) Case (c) Commission rate at 15% Commission rate at 20% Own Sales Force Contribution margin 1,04,00,000 $ 91,00,000 $ 1,23,50,000 (-) Fixed costs -59,42,000 $ -59,42,000 $ -97,22,400 Net Operating Income 44,58,000 $ 31,58,000 $ 26,27,600 Degree of Operating Leverage 2.33 2.88 4.70 (Contribution margin/Net Operating Income) (10400000/4458000) (9100000/3158000)| (12350000/2627600)