Homework #4 Saved Help Save & Exit Submit Case 5-33 Cost Structure: Break-Even and Target Profit Analysis L05-4, LO5-5, LO5-6] 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. points 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 Manufacturing expenses: eBook 24,90e,e00 Variable Fixed overhead $10,800,000 3,368,0e0 References 14, 160,80e 9, 840,08e Gross margin Selling and administrative expenses: Commissions to agents Fixed marketing expenses Fixed administrative expenses 3,608,088 168,000 2,128,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) Net income 5,888,980 3,952,00e 840,000 3,112,000 933,600 2,178,400 Primarily depreciation on storage facilities Homework #4 Saved Help Save &ExitSubmit 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. How can they possibly defend a 20% 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 polnts "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? eBook "We've already worked them up." said Barbara. "Several companies we know about pay a 75% 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 $3,600,000 per year, but that would be more than offset by the $4,800,000 (20% x $24,000,000) that we would avoid on agents commissions. References The breakdown of the $3,600,000 cost follows Salaries: Sales manager $ 150,080 Salespersons Travel and entertainment Advertising Total 600,0ee 1,950,000 $3,680,0e0 Homework #4 Saved Help Save & Exit Submit "Super" replied Karl-And I noticed that the $3,600,000 equals what we're paying the agents under the old 15% commission rate." "It's even better than that," explained Barbara. "We can actually save $110.400 a year because that's what we're paying our auditors 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." points 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 Skipped eBook References 2. 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: 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. Homework #4 0 Saved Help Save & Ext Submit Complete this question by entering your answers in the tabs below. 10 Required 1Required 2 Required 3 Required 4 Compute Pittman Company's break-even point in dollar sales for next year assuming: (Round CM ratio to 3 decimal places and final answers to the nearest dollar amount.) points Break-Even Point Skipped a. | The agents' commission rate remains unchanged at 15%, b. The agents' commission rate is increased to 20%. eBook c. The company employs its own sales force References Required 1 Required 2 > Homework #4 0 Saved Help Save & Exit Submit C. The company employs its own sales force. Use income before income taxes in your operating leverage computation. 10 Complete this question by entering your answers in the tabs below Required1 Required 2 Required 3 Required 4 points Skipped 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. (Round CM ratio to 3 decimal places and final answer to the nearest dollar amount.) eBook sales (in dollars References Required 1 Required 3 Homework #4 0 Saved Help Save & Exit Submit 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. Complete this question by entering your answers in the tabs below polnts Required 1 Required 2Required 3 Required 4 Skipped 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.) eBook of sales (in References Required 2 Required 4> Homework #4 0 Help Save &ESubmit Saved Complete this question by entering your answers in the tabs below 10 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.) points Skipped Degree of Operating Leverage a. The agents b The agents' commission rate is increased to 20%. c. The company employs its own sales force. n rate remains unchanged at 15%. eBook References KRequired 3 Required 4