Question

Pitman Company is a smal but growing 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 18% for all items sold. Barbara Cheney, Pittman's controller, has just prepared the company's budgeted income statement for next year. The statement follows: Pittman Company Budgeted Income Statement For the Year Ended December 31 S 16,900,000 Manufacturing expenses: S 7,350,000 ariable Fixed overhead 2,460,000 9,810,000 Gross margin Selling and administrative expenses: 7,090,000 Commissions to agents Fixed marketing expenses 3,042,000 150,000 1,950,000 5,142,000 Net operating income Fixed interest expenses S 1,948,000 570,000 Income before income taxes Income taxes (20%) 1,378,000 275,600 Net income 1,102,400 Primarily depreciation on storage facilities. As Barbara handed the statement to Karl Vecci, Pittman's president, she commented, "l went ahead and used the agents 18% 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 23%. 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 23% 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? we've already worked them up," said Barbara. "Several companies we know about pay a 6.3% commission to their own salespeople, along with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fixed expenses would increase by $3,042,000 per year, but that would be more than offset by the $3,887,000 (23% $16,900,000) that we would avoid on agents' commissions." The breakdown of the $3,042,000 cost follows: Sales manager $130,000 750,000 520,000 1,642,000 Travel and entertainment Advertising Total $3,042,000 Super," replied Karl. "And I noticed that the $3,042,000 is just what we're paying the agents under the old 18% commission rate." It's even better than that," explained Barbara. "We can actually save $90,000 a year because that's what we're having to pay the auditing firm now to check out the agents reports. So our overall administrative costs would be less. Pull all of these numbers together and we'll show them to the executive committee tomorrow," said Karl. With the approval of the committee, we can move on the matter immediately. Required: 1. Compute Pittman Company's break-even point in dollar sales for next year assuming: (Enter your answer in whole dollars and not in thousands. Round CM ratio to 3 decimal places and final answer to the nearest dollar amount.) a. The agents' commission rate remains unchanged at 18%. in dollar sales b. The agents' commission rate is increased to 23%. in dollar sales 4. Compute the degree of operating leverage that the company would expect to have on December 31 at the end of next year assuming: a. The agents' commission rate remains unchanged at 18%. (Round your answer to 2 decimal places.) of operating leverage b. The agents' commission rate is increased to 23%. (Round your answer to 2 decimal places.) of operating leverage c. The company employs its own sales force. (Round your answer to 2 decimal places.) of operating leverage

Answer 1

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