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: 1:06:50 $ 20,000,000 Fook 11,800,000 8,200,000 rint Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses: Variable $ 9,000,000 Fixed overhead 2,800,000 Gross margin Selling and administrative expenses: Commissions to agents 3,000,000 Fixed marketing expenses 140,000* Fixed administrative expenses 1,960,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) Net income rences 5,100,000 3,100,000 700,000 2,400,000 720,000 $ 1,680,000 *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

Answer 1

Solution 1:
	15% commission	20% commission	own sales force
Sales	20000000	20000000	20000000
Variable expenses:
Manufacturing	9000000	9000000	9000000
Commission	3000000	4000000	1500000
Total variable expenses	12000000	13000000	10500000
Contribution margin	8000000	7000000	9500000
Variable expenses ratio	60.00%	65.00%	52.50%
Contribution margin ratio	40.000%	35.000%	47.500%
Fixed expenses:
Manufacturing overhead	2800000	2800000	2800000
Marketing	140000	140000	3140000
Administrative	1960000	1960000	1868000
Interest	700000	700000	700000
Total fixed expenses	5600000	5600000	8508000
Income before income taxes	2400000	1400000	992000
Income taxes(30%)	720000	420000	297600
Net income	1680000	980000	694400
Break Even Point in dollars (Total Fixed Expenses/Controbution margin ratio)	14000000	16000000	17911579
Solution 2:
Income before tax as per income statement	2400000
Total Fixed Expenses (when 20% commission)	5600000
Total	8000000
/ Contribution margin ratio (When 20% commission)	35.000%
Sales required to generate target profit	22857143
Solution 3:
Let Sales Volume be "X"
Total Cost when commission 20% = Total Cost for Own sales Force
0.6500*X +5600000 = 0.5250*X +8508000
0.125*X = 2908000
X = 2908000/0.125
X = 23264000
Hence, Sales volume required is $23,264,000.
Solution 4:
	15% commission	20% commission	own sales force
Contribution margin	8000000	7000000	9500000
Income before taxes	2400000	1400000	992000
Degree of Operating Leverage (Contribution margin/Income before taxes)	3.33	5.00	9.58