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

Solution 1:
	15% commission	20% commission	own sales force
Sales	23500000	23500000	23500000
Variable expenses:
Manufacturing	10575000	10575000	10575000
Commission	3525000	4700000	1762500
Total variable expenses	14100000	15275000	12337500
Contribution margin	9400000	8225000	11162500
Variable expenses ratio	60.00%	65.00%	52.50%
Contribution margin ratio	40.000%	35.000%	47.500%
Fixed expenses:
Manufacturing overhead	3290000	3290000	3290000
Marketing	164500	164500	3689500
Administrative	2100000	2100000	1991900
Interest	822500	822500	822500
Total fixed expenses	6377000	6377000	9793900
Income before income taxes	3023000	1848000	1368600
Income taxes(30%)	906900	554400	410580
Net income	2116100	1293600	958020
Break Even Point in dollars (Total Fixed Expenses/Controbution margin ratio)	15942500	18220000	20618737
Solution 2:
Income before tax as per income statement	3023000
Total Fixed Expenses (when 20% commission)	6377000
Total	9400000
/ Contribution margin ratio (When 20% commission)	35.000%
Sales required to generate target profit	26857143
Solution 3:
Let Sales Volume be "X"
Total Cost when commission 20% = Total Cost for Own sales Force
0.6500*X +6377000 = 0.5250*X +9793900
0.125*X = 3416900
X = 3416900/0.125
X = 27335200
Hence, Sales volume required is $27,335,200.
Solution 4:
	15% commission	20% commission	own sales force
Contribution margin	9400000	8225000	11162500
Income before taxes	3023000	1848000	1368600
Degree of Operating Leverage (Contribution margin/Income before taxes)	3.11	4.45	8.16