Question

make a recommendation as to whether the company should continue to use sales agents...or employ its own sales force.

$19,500,000 SlaltiTICUL IUI TIEAL ytai as IUIIUVVS. Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses : Variable $8,775,000 Fixed overhead 2,730,000 Gross margin Selling and administrative expenses : Commissions to agents 2,925,000 Fixed marketing expenses 136,500+ Fixed administrative expenses 1,940,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) Net income 11,505,000 7,995,000 5,001,500 2,993,500 682,500 2,311,000 693,300 $ 1,617,700

Answer 1

Answer :Because paying commission results in lower Break Even Point than
employing Sales Staff, so sales agents should continue.
DETAILS:
If agents continues to be paid commissions.
The commission is a Variable cost.
Sales	19500000
Variable costs:
Manuf.	8775000
commission	2925000
Total Variable costs	11700000
Contribution	7800000	(Sales - Total Variable costs)
Contribution margin	0.4	(contri/Sales)
Fixed costs:
Manuf.	2730000
marketing	136500
Admin	1940000
Interest	682500
Income tax	693300
Total Fixed Costs	6182300
BEP, $	15455750	(Total Fixed Cost/Contribution margin)
If Commission is replaced by Sales Staff
The expense is a Fixed Cost.
Sales	19500000
Variable costs:
Manuf.	8775000
Total Variable costs	8775000
Contribution	10725000	(Sales - Total Variable costs)
Contribution margin	0.55	(contri/Sales)
Fixed costs:
Manuf.	2730000
marketing	136500
Admin	1940000
Interest	682500
Sales Staff	2925000
Income tax	693300
Total Fixed Costs	9107300
BEP, $	16558727.27	(Total Fixed Cost/Contribution margin)