Question

Check my work Case 5-33 Cost Structure; Break-Even and Target Profit Analysis (L05-4, LOS-5, LO5-6) 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 al items sold. Barbara Cheney, Pittman's controller, has just prepared the company's budgeted Income statement for next year as follows: Pittman Company Budgeted Income Statement For the Year Ended December 31 $16,500,000 $7.425,000 2,310,000 9.735,000 6,765,000 Manufacturing expenses Variable Fixed overhead Gross margin Selling and administrative expenses Commissions to agents Pixed marketing expenses Fixed administrative expenses Net operating income Fixed interest expenses Income before income taxes Income taxes (301) Net Income 2,475,000 115,500 1.820,000 4.410.500 2,354,500 $27500 1.777.000 531,100 $ 1.243,900 "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 prot replied < Prex 9 of 12 Next > MacBook Air

Answer 1

Solution 1:
	15% commission	20% commission	own sales force
Sales	16500000	16500000	16500000
Variable expenses:
Manufacturing	7425000	7425000	7425000
Commission	2475000	3300000	1237500
Total variable expenses	9900000	10725000	8662500
Contribution margin	6600000	5775000	7837500
Variable expenses ratio	60.00%	65.00%	52.50%
Contribution margin ratio	40.000%	35.000%	47.500%
Fixed expenses:
Manufacturing overhead	2310000	2310000	2310000
Marketing	115500	115500	2590500
Administrative	1820000	1820000	1744100
Interest	577500	577500	577500
Total fixed expenses	4823000	4823000	7222100
Income before income taxes	1777000	952000	615400
Income taxes(30%)	533100	285600	184620
Net income	1243900	666400	430780
Break Even Point in dollars (Total Fixed Expenses/Controbution margin ratio)	12057500	13780000	15204421
Solution 2:
Income before tax as per income statement	1777000
Total Fixed Expenses (when 20% commission)	4823000
Total	6600000
/ Contribution margin ratio (When 20% commission)	35.000%
Sales required to generate target profit	18857143
Solution 3:
Let Sales Volume be "X"
Total Cost when commission 20% = Total Cost for Own sales Force
0.6500*X +4823000 = 0.5250*X +7222100
0.125*X = 2399100
X = 2399100/0.125
X = 19192800
Hence, Sales volume required is $19,192,800.
Solution 4:
	15% commission	20% commission	own sales force
Contribution margin	6600000	5775000	7837500
Income before taxes	1777000	952000	615400
Degree of Operating Leverage (Contribution margin/Income before taxes)	3.71	6.07	12.74