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: $21,000,000 12,390,000 8,610,000 Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses: Variable $9,450,000 Fixed overhead 2,940,000 Gross margin Selling and administrative expenses : Commissions to agents 3,150,000 Fixed marketing expenses 147,000 Fixed administrative expenses 2,000,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) Net income 5,297,000 3,313,000 735,000 2,578,000 773,400 $ 1,804,600 *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 your people to work up some cost figures for us to look at?"

Answer 1

a)
Pittman Company
Budgeted Income Statement
For the Year Ended December 31
	15% Commission		20% Commission		Own Sales Force
Sales	$21,000,000.00	100.00%	$21,000,000.00	100.00%	$21,000,000.00	100.00%
Variable Expenses
Manufacturing expenses:	$  9,450,000.00		$  9,450,000.00		$  9,450,000.00
Commissions (15%, 20%, 7.5%)	$  3,150,000.00		$  4,200,000.00		$  1,575,000.00
Total variable expenses	$12,600,000.00	60.00%	$13,650,000.00	65.00%	$11,025,000.00	52.50%
Contribution Margin (sales - total variable exp.)	$  8,400,000.00	40.00%	$  7,350,000.00	35.00%	$  9,975,000.00	47.50%
Fixed  expenses
Manufacturing overhead	$  2,940,000.00		$  2,940,000.00		$  2,940,000.00
Marketing	$     147,000.00		$     147,000.00		$  3,297,000.00
Administrative	$  2,000,000.00		$  2,000,000.00		$  1,903,400.00
Interest Expenses	$     735,000.00		$     735,000.00		$     735,000.00
Total fixed expenses	$  5,822,000.00		$  5,822,000.00		$  8,875,400.00
Income before income taxes	$  2,578,000.00		$  1,528,000.00		$  1,099,600.00
Income taxes (30%)	$     773,400.00		$     458,400.00		$     329,880.00
Net income	$  1,804,600.00		$  1,069,600.00		$     769,720.00
BEP  (dollars)= Fixed Cost/ contribution Margin ratio BEP (15% commission=	$14,555,000.00	BEP (20% commission)	$16,634,285.71	BEP(Own sales force)	18685052.63
2)
Dollar sales to attain target = Target income before taxes + Fixed expenses/CM ratio
Dollar sales to attain target =( $2578000+5,822,000)/35%
Volume of sales in dollars	$24,000,000.00
3)
X = Total sales Revenue
VC + FC = VC + FC
65% X + $5,822,000 = 52.50%X + 8,875,400	$24,427,200.00
Total Sales Revenue	$24,427,200.00
4)
	15% Commission	20% Commission	Own Sales Force
Contribution Margin Part 1 (a)	8400000	7350000	9975000
Income before Taxes Part 1(b)	2578000	1528000	1099600
Operating Leverage = a / b	3.26	4.81	9.07

43 a) 44 Pittman Company 45 Budgeted Income Statement 46 For the Year Ended December 31 47 15% Commission 21000000 20% Commission =B48 Own Sales Force =B48 9450000 =B48 15% =B50+B51 =B48-B52 B52/B48 =B53/B48 =B50 =D48*20% =D50+D51 =D48-D52 4052/04R =D53/D48 =D50 =F48*7.5% =F50+F51 =F48-F52 =F52/F48 =F53/F48 48 Sales 49 Variable Expenses 50 Manufacturing expenses: 51 Commissions (15%, 20%, 7.5%) 52 Total variable expenses 53 Contribution Margin (sales - total variable exp.) 54 Fixed expenses 55 Manufacturing overhead 56 Marketing 57 Administrative 58 Interest Expenses 59 Total fixed expenses 60 Income before income taxes 61 Income taxes (30%) 62 Net income 2940000 147000 2000000 735000 =B55+B56+B57+B58 =B53-B59 =B60"30% =B60-161 =B55 =B56 =B57 =B58 =D55+D56+D57+D58 =D53-D59 =D60"30% =D60-D61 =D55 =D56+3150000 =D57-96600 =D58 =F55+F56+F57+F58 =F53-F59 =F60"30% =F60-F61 63 BEP (dollars) Fixed Cost/ contribution Margin ratio BEP (15% commission= =B59/C53 | BEP (20% commission) =D59/E53 BEP (Own sales force) =F59/G53 65 2) 66 Dollar sales to attain target = Target income before taxes + Fixed expenses/CM ratio 67 Dollar sales to attain target = { $2578000+5,822,000 y35% 68 Volume of sales in dollars =(B60+D59/E53 69 70 3) 71 X = Total sales Revenue 72 VC + FC = VC + FC 73 65% X + $5,822,000 = 52.50%X + 8,875,400 74 Total Sales Revenue =(F59-D59)(E52-G52) =B73 76 4) 77 78 Contribution Margin Part 1 (a) 79 Income before Taxes Part 1(b) 80 Operating Leverage = a/b 15% Commission =B53 =B60 =B78/B79 20% Commission =D53 =D60 =C78/C79 Own Sales Force =F53 =F60 =D78/D79 B2