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Saved Help Case 5-33 Cost Structure; Break-Even and Target Profit Analysis [LO5-4, LO5-5, LO5-6 Pittman Company is a small but growing manufacturer of telecommunicationds 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 Pittman Company Budgeted Income Statement For the Year Ended December 31 20,500,000 Sales Manufacturing expensent Variable Pixed overhead 9,225,000 2,870,000 12,095,00 es Gross margin Selling and administrative expensess ,405,000 Commissions to agents Pixed marketing expenses Pixed administrative expenses ,075,000 143,500 80.000 Net operating income Pixed interest expenses Income before income taxes Income taxes (30%) Net income 5 198,500 3,206,500 717,500 2,489,000 46-700 1,742,300 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 Chapter 5 Help Saved Primarily depreciation on storage facilities As Barbara handed the statement to Karl Vecc, Pittman's president, she commented,-i went ahead and used the agents,5% 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 How can they possibly defend a 20% commission rate?" agents have been demanding more and more, and this time they've gone too far 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," your people to work up some cost figures for us to look at? "We've already worked them up," said Barbara along with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fixed expenses would increase roe Kart andl ais sy it tme we dumped those guys and got our own sales force Can you it's time we dumped those guys and got our own sales force. Can you get 1 say its ust lain oe Sever al companies we know about pay a 75% commission to their own salespeople. $3,075,000 per year, but that would be more than offset by the $4100,000 (20%-$20.500,000) that we would avoid on agents' commissions. The breakdown of the $3,075,000 cost follows: Salaries i 128,125 768,750 512,500 1.665,625 $3,075,000 Sales manager Salespersons Travel and entertainment Advertiaing Total "Super," replied Karl. "And noticed that the $3,075,000 equals what we're paying the agents under the old 15% commission rate." Prev 9 of 12 lll Next > The breakdown of the $3,075,000 cost follows: Salaries 128,125 768,750 512,500 1,665,625 Sales manager Salespersons Travel and entertainment Advertising Total 3,075,000 "Super," replied Karl. "And I noticed that the $3,075,000 equals what we're paying the agents under the old 15% commission rate." s even better than that," explained Barbara. "We can actually save $94,300 a year because that's what we're paying our auditors to nces check out the agents' reports.So our overall administrative expenses 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: a. The agents' commission rate remains unchanged at 15%. b. The agents' commission rate is increased to 20%. c. The company employs its own sales force. Assume that Pittman Company decides to continue selling through agents and pays the 20% commission rate. Determine the dollar sales that would be required to generate the same net income as contained in the budgeted income statement for next year 3. Determine the dollar sales at which net income would be equal regardless of whether Pittman Company sells through agents (at a 20% commission rate) or employs its own sales force. 4. Compute the degree of operating leverage that the company would expect to have at the end of next year assuming Required: 1. Compute Pittman Company's break-even point in dollar sales for next year assuming: a. The agents' commission rate remains unchanged at 15%. b. The agents' commission rate is increased to 20%. c. The company employs its own sales force. 2. Assume that Pittman Company decides to continue selling through agents and pays the 20% commission rate. Determine the dollar Sioosd sales that would be required to generate the same net income as contained in the budgeted income statement for next year 3. Determine the dollar sales at which net income would be equal regardless of whether Pittman Company sells through agents (at a 20% commission rate) or employs its own sales force. 4. Compute the degree of operating leverage that the company would expect to have at the end of next year assuming a. The agents' commission rate remains unchanged at 15%. b. The agents' commission rate is increased to 20%, c. The company employs its own sales force Use income before income taxes in your operating leverage computation. Print ndererces Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Compute the degree of operating leverage that the company would expect to have at the end of next year assuming: (Use income before income taxes in your operating leverage computation.)(Round your answers to 2 decimal places) Degree of a The agents commisson rate remains unchanged at 15%. s. Determine the aoiar sales at which net income would be equat regaraiess of wnetner Mittman Company sells through agents (at a 20% commission rate) or employs its own sales force. Compute the degree of operating leverage that the company would expect to have at the end of next year assuming: a. The agents' commission rate remains unchanged at 15%. b. The agents' commission rate is increased to 20%. c. The company employs its own sales force. Use income before income taxes in your operating leverage computation ets Complete this question by entering your answers in the tabs below Book Print Required 1 Required 2Required 3 Required 4 Determine the dollar sales at which net income would be equal regardless of whether Pittman Company sells through agents (at a 20% commission rate) or employs its own sales force. (Do not round intermediate calculations.) C Required 2 Required 4 > s. Uetermine the dolar sales at which net income would be equal regaraless ot whether Mittman Company sells through agents (at a 20% commission rate) or employs its own sales force. 4. Compute the degree of operating leverage that the company would expect to have at the end of next year assuming: a. The agents' commission rate remains unchanged at 15%. b. The agents' commission rate is increased to 20%. c. The company employs its own sales force Use income before income taxes in your operating leverage computation. 0 oints Skipped Complete this question by entering your answers in the tabs below eBlook Print References Required 1 Required 2 Required 31 quired 4 Compute the degree of operating leverage that the company would expect to have at the end of next year assuming: (Use income before income taxes in your operating leverage computation.)(Round your answers to 2 decimal places.) Degree of Operating Leverage a b C. The agents' commission rate remains unchanged at 15% The agents' commission rate is increased to 20%. The company employs its own sales force Required 3

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