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CASE 5-33 Cost Structure; Break-Even and Target Profit Analysis 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 20% 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 Sales $16,000,000 Fked overhead.. Gross margin Selling and administrative expenses: 2,340,000 9,540,000 6,460,000 120,000 Fxed administrative expenses 1,800,000 ,320,000 2,140,000 540,000 1,600,000 hoome taxes (30%) 1,120,000 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' 20% 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 25%." "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 25% 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 CASE 5-33 Cost Structure; Break-Even and Target Profit Analysis 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 20% 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 Sales $16,000,000 Fked overhead.. Gross margin Selling and administrative expenses: 2,340,000 9,540,000 6,460,000 120,000 Fxed administrative expenses 1,800,000 ,320,000 2,140,000 540,000 1,600,000 hoome taxes (30%) 1,120,000 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' 20% 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 25%." "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 25% 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

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