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: $ 26,000,000 15,340,000 10,660,000 Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses: Variable $11,700,000 Fixed overhead 3,640,000 Gross margin Selling and administrative expenses: Commissions to agents 3,900,000 182,000 Fixed marketing expenses 2,200,000 Fixed administrative expenses Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) Net Income 6,282,000 4,378,000 910,000 3,468,000 1,040,400 $ 2,427,600

Answer 1

a.	Break-even point in dollar sales						17,330,000
	BEP(dollar sales) =		fixed expense/contribution margin ratio
			Fixed cost				6,932,000
			Contribution margin				40.0%
b)	Break even point in dollar sales						19,805,714
c)	Break even point in dollar sales						22,552,421
2)	Voulme of sales (in dollars)						29,714,286
	(Target income before taxes +fixed expense)/contribution margin
3)	Voulme of Sales (in dollars)						30,243,200
	X =	total evenue
	.65 X + 6,932,000=		.525x +10,712,400
		0.125	x	=		3,780,400
			x =	30243200
4)
a)	Degree of operating leverage						3.00
b)	Degree of operating leverage						4.20
c)	Degree of operating leverage						7.54
	degree of operating leverage = contribution marging/income before taxes

Working

			15% comm		20% comm		7.5% comm
Sales			26,000,000	100%	26,000,000	100%	26,000,000	100%
Variable expenses:
manufacturing			11,700,000		11,700,000		11,700,000
comissions (15%;20%,7.5%)			3,900,000		5200000		1950000
total variable expense			15,600,000	60.0%	16,900,000	65.0%	13,650,000	52.5%
contribution margin			10,400,000	40.0%	9,100,000	35.0%	12,350,000	47.5%
fixed expenses
manufacturing overhead			3,640,000		3,640,000		3,640,000
marketing			182,000		182,000		4,082,000
administrative			2,200,000		2,200,000		2,080,400
interest			910,000		910,000		910,000
total fixed expense			6,932,000		6,932,000		10,712,400
income before income taxes			3,468,000		2,168,000		1,637,600
income taxes (30%)			1040400		650400		491280
net income			2,427,600		1,517,600		1,146,320
increase in fixed expense-marketing							3,900,000
saving in administrative expense							-119600