Question

Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales...

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 16% 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 $ 16,300,000
Manufacturing expenses:
Variable $ 7,250,000
Fixed overhead 2,380,000 9,630,000
Gross margin 6,670,000
Selling and administrative expenses:
Commissions to agents 2,608,000
Fixed marketing expenses 130,000*
Fixed administrative expenses 1,850,000 4,588,000
Net operating income 2,082,000
Fixed interest expenses 550,000
Income before income taxes 1,532,000
Income taxes (35%) 536,200
Net income $ 995,800

*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’ 16% 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 21%.”

“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 21% 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 7.6% 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 $2,608,000 per year, but that would be more than offset by the $3,423,000 (21% × $16,300,000) that we would avoid on agents’ commissions.”

The breakdown of the $2,608,000 cost follows:

   

Salaries:
Sales manager $ 110,000
Salespersons 650,000
Travel and entertainment 440,000
Advertising 1,408,000
Total $ 2,608,000

“Super,” replied Karl. “And I noticed that the $2,608,000 is just what we’re paying the agents under the old 16% commission rate.”

“It’s even better than that,” explained Barbara. “We can actually save $80,000 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 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.”

3. Determine the volume of sales at which net income would be equal regardless of whether Pittman Company sells through agents (at a 21% commission rate) or employs its own sales force. (Enter your answer in whole dollars and not in thousands. Round CM ratio to 3 decimal places.)

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 16%. (Round your answer to 2 decimal places.)

b. The agents’ commission rate is increased to 21%. (Round your answer to 2 decimal places.)

c. The company employs its own sales force. (Round your answer to 2 decimal places.)

Homework Answers

Answer #1

Break even sales is the point at which firm will get either profit or loss

(1)volume of sales at which net income would be equal regardless of whether Pittman Company employ its own sales force

break even sales=fixed cost/profit valume ratio

Fixed overhead 2380000
Fixed marketing expenses 1,30,000
Fixed administrative expenses 1850000
Fixed interest expenses 550000
Total Fixed cost 4910000

Profit valume ratio=sales-variables cost

P/V ratio=16300000/7250000=44.49%

BES=4910000/44.49%

11039034

(2)volume of sales at which net income would be at 21% commission

break even sales=fixed cost/profit valume ratio

Fixed overhead 2380000
Fixed marketing expenses 1,30,000
Fixed administrative expenses 1850000
Fixed interest expenses 550000
Total Fixed cost 4910000

Profit valume ratio=sales-variables cost

P/V ratio=12630000/5617638=44.49%

BES=4910000/44.49%

12630000

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales...
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: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales $ 23,500,000 Manufacturing expenses: Variable $...
Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales...
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 19% 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 $ 17,200,000 Manufacturing expenses: Variable...
Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The...
Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 21% of sales. The income statement for the year ending December 31, 2017, is as follows. BONITA BEAUTY CORPORATION Income Statement For the Year Ended December 31, 2017 Sales $70,800,000 Cost of goods sold     Variable $33,276,000     Fixed 8,840,000 42,116,000     Gross margin $28,684,000 Selling and marketing expenses     Commissions $14,868,000     Fixed costs 10,570,000 25,438,000     Operating income $3,246,000 The company is...
Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The...
Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 21% of sales. The income statement for the year ending December 31, 2017, is as follows. BONITA BEAUTY CORPORATION Income Statement For the Year Ended December 31, 2017 Sales $79,000,000 Cost of goods sold     Variable $38,710,000     Fixed 8,750,000 47,460,000     Gross margin $31,540,000 Selling and marketing expenses     Commissions $16,590,000     Fixed costs 10,610,000 27,200,000     Operating income $4,340,000 The company is...
Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The...
Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 20% of sales. The income statement for the year ending December 31, 2017, is as follows. BONITA BEAUTY CORPORATION Income Statement For the Year Ended December 31, 2017 Sales $77,300,000 Cost of goods sold     Variable $37,877,000     Fixed 8,760,000 46,637,000     Gross margin $30,663,000 Selling and marketing expenses     Commissions $15,460,000     Fixed costs 10,000,000 25,460,000     Operating income $5,203,000 The company is...
Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The...
Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 18% of sales. The income statement for the year ending December 31, 2020, is as follows. BONITA BEAUTY CORPORATION Income Statement For the Year Ended December 31, 2020 Sales $70,700,000 Cost of goods sold     Variable $28,280,000     Fixed 8,810,000 37,090,000     Gross margin $33,610,000 Selling and marketing expenses     Commissions $12,726,000     Fixed costs 10,102,600 22,828,600     Operating income $10,781,400 The company is...
Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The...
Bonita Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 20% of sales. The income statement for the year ending December 31, 2020, is as follows. BONITA BEAUTY CORPORATION Income Statement For the Year Ended December 31, 2020 Sales $76,400,000 Cost of goods sold     Variable $32,852,000     Fixed 8,720,000 41,572,000     Gross margin $34,828,000 Selling and marketing expenses     Commissions $15,280,000     Fixed costs 10,360,900 25,640,900     Operating income $9,187,100 The company is...
Kindle, Inc. manufactures cosmetic products that are sold through a network of sales agents. The agents...
Kindle, Inc. manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 12.5% of sales. The income statement for the year ending December 31, 2019, is as follow. KINDLE, INC. Income Statement Year Ending December 31, 2019 Sales $130,000 Cost of goods sold Variable $58,500 Fixed 14,350 72,850 Gross margin 57,150 Selling and marketing expenses Commissions $16,250 Fixed costs 17,100 33,350 Operating income $23,800 The company is considering hiring its own...
Kindle, Inc. manufactures cosmetic products that are sold through a network of sales agents. The agents...
Kindle, Inc. manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 12.5% of sales. The income statement for the year ending December 31, 2019, is as follow. KINDLE, INC. Income Statement Year Ending December 31, 2019 Sales $130,000 Cost of goods sold Variable $58,500 Fixed 14,350 72,850 Gross margin 57,150 Selling and marketing expenses Commissions $16,250 Fixed costs 17,100 33,350 Operating income $23,800 The company is considering hiring its own...
Marston Corporation manufactures disposable thermometers that are sold to hospitals through a network of independent sales...
Marston Corporation manufactures disposable thermometers that are sold to hospitals through a network of independent sales agents located in the United States and Canada. These sales agents sell a variety of products to hospitals in addition to Marston's disposable thermometer. The sales agents are currently paid an 19% commission on sales, and this commission rate was used when Marston's management prepared the following budgeted absorption income statement for the upcoming year. Marston Corporation Budgeted Income Statement   Sales $ 33,000,000   Cost...