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: $22,500,000 pittman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses Variable $10,125,000 Fixed overhead 3,150,000 Gross margin Selling and administrative expenses Commissions to agents 3,375,000 Pixed marketing expenses 157,500 Fixed administrative expenses 2,060,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (305) Net income 13,275,000 9,225,000 5,592,500 3,632,500 787.500 2,845,000 953,500 $ 1,991,500

Answer 1

a.	Break-even point in dollar sales						15,387,500
	BEP(dollar sales) =		fixed expense/contribution margin ratio
			Fixed cost				6,155,000
			Contribution margin				40.0%
b)	Break even point in dollar sales						17,585,714
c)	Break even point in dollar sales						19,845,263
2)	Voulme of sales (in dollars)						25,714,286
	(Target income before taxes +fixed expense)/contribution margin
3)	Voulme of Sales (in dollars)						26,172,000
	X =	total evenue
	.65 X + 6,155,000=		.525x +9,426,500
		0.125	x	=		3,271,500
			x =	26172000
4)
a)	Degree of operating leverage						3.16
b)	Degree of operating leverage						4.58
c)	Degree of operating leverage						8.48

Working notes:

			15% comm		20% comm		7.5% comm
Sales			22,500,000	100%	22,500,000	100%	22,500,000	100%
Variable expenses:
manufacturing			10,125,000		10,125,000		10,125,000
comissions (15%;20%,7.5%)			3,375,000		4500000		1687500
total variable expense			13,500,000	60.0%	14,625,000	65.0%	11,812,500	52.5%
contribution margin			9,000,000	40.0%	7,875,000	35.0%	10,687,500	47.5%
fixed expenses
manufacturing overhead			3,150,000		3,150,000		3,150,000
marketing			157,500		157,500		3,532,500
administrative			2,060,000		2,060,000		1,956,500
interest			787,500		787,500		787,500
total fixed expense			6,155,000		6,155,000		9,426,500
income before income taxes			2,845,000		1,720,000		1,261,000
income taxes (30%)			853500		516000		378300
net income			1,991,500		1,204,000		882,700
increase in fixed expense-marketing							3,375,000
saving in administrative expense							-103500