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: $ 23,500,000 13,865,000 9,635,000 Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses: Variable $ 10,575,000 Fixed overhead 3,290,000 Gross margin Selling and administrative expenses: Commissions to agents 3,525,000 Fixed marketing expenses 164,500* Fixed administrative expenses 2,100,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) Net income 5,789,500 3,845,500 822,500 3,023,000 906,900 $ 2,116,100 * 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%." "That's the last straw," Karl replied angrily. "Those agents have been demanding more and more, and this time they've gone too far. How can they possibly defend a 20% commission rate?" "They claim that after paying for advertising, travel, and the other costs of promotion, there's nothing left over for profit," replied Barbara. "I say it's just plain robbery," retorted Karl. "And I also say it's time we dumped those guys and got our own sales force. Can you get

Answer 1

	Compute Pittman Cp's break Even Point in $ sales for
	next Year assuming
	a) the agen commission - Unchanged 15%
	b) the agen commission - increased to 20%
	c) compamy employed its own Sales force
	Income Statement
		Commission @15%$	Commission @20%$	Own Sales force$
	Sales -a	2,35,00,000	2,35,00,000	2,35,00,000
	Less
	Manufacturing Cost	1,05,75,000	1,05,75,000	1,05,75,000
	( Variable)
	Sales Commission	35,25,000	47,00,000	17,62,500
	( 15% on Revenue
	( 20% on Revenue
	( 7.5% on Revenue )
	Total Variable cost-b	1,41,00,000	1,52,75,000	1,23,37,500
	Contrbution margin(a-b)	94,00,000	82,25,000	1,11,62,500
	Contrbution margin%	40%	35%	48%
	Less
	Fixed cost
	Fixed Overhead	32,90,000	32,90,000	32,90,000
	Fixed Marketing Expenses	1,64,500	1,64,500	36,89,500	( as below Cal)
	Fixed Administratin Expenses	21,00,000	21,00,000	19,91,900
	Fixed Interest cost	8,22,500	8,22,500	8,22,500
	Total Fixed cost	63,77,000	63,77,000	97,93,900
	Income Before tax	30,23,000	18,48,000	13,68,600
	Tax30%	9,06,900	5,54,400	4,10,580
	Net Profit after tax	21,16,100	12,93,600	9,58,020
	Derived Fixed Marketing Expesnes - Own Sales force
				Amnt($)
	Fixed Marketing cost			1,64,500
	Add- Amount pais as commission			35,25,000
	Total Marketing cost			36,89,500
	Derived Fixed Admin Expesnes - Own Sales force			Amnt($)
	Fixed admin Expenses ( as given in Question)			21,00,000
	Less - Cost savings ( as mentioned in Question)			1,08,100
	Fixed Admin Expenses			19,91,900
	Calcuate $ Value Break Even Point
	Commission @15%
	Break Even Point	Total Fixed cost/ contribution %
	Break Even Point $	($6377000/40%)	1,59,42,500
	Commission @20%
	Break Even Point	Total Fixed cost/ contribution %
	Break Even Point $	($6377000/35%)	1,82,20,000
	Commission Own Sales force
	Break Even Point	Total Fixed cost/ contribution %
	Break Even Point $	($9793900/48%)	2,06,18,737
Answer2	Need to calculate desired Sale to Achieve
	As calculated above	Amnt($)
	Total Fixed cost	63,77,000
	AddIncome Before tax	30,23,000
	Total=A	94,00,000
	Contribution margin-B	40%
	Desired Sales $	2,35,00,000
Answer3	Determine volume of sales at which
	net income would be Equal rgardless whether
	Pitman company pay 20% commission or Own Sale force
	At 20% commission Time
	Contribution margin	35%
	At Own Sales force
	Contribution margin	48%
	(100%-35%)*X+ Fixed cost = (100%-48%)*x+Fixed cost
	65%*x+6377000=	52%*x+9793900
	X represents- Volume of Required sales
	65%x-52%x =9793900-6377000
	x(65%-52%)= 3416900
	x=	2,62,83,846
	So Desired Sales Value required in Next Year $			2,62,83,846