Building Your Skills Case [LO6-4, LOG-5, LO6-6 35 points Pittman Company is a sm

Question

Building Your Skills Case [LO6-4, LOG-5, LO6-6 35 points 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 a items sold. Barbara Cheney, Pittman's controller, has just prepared the company's budgeted income statement for next year as follows: Pittman Budgeted Income Etatement Sales Hanufacturing expenses 25,000,000 Print Variable Pixed overhead 11,250,000 Gross margin Selling and administrative expensess 3,500,000 14,750,000 0,250,000 Comminsione to agente rixed marketing expenses Pixed administrative expenses 3,750,000 175,000 Set operating income rixed interest expenses Income before income taxes tncome taxes (30 2,160,000 6.085,000 4,165,000 075,000 3,290,000 2,303,000 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' 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 Prey 10, 1EE Next

Explanation / Answer

Ans 1 15% comission 20% commission own sales force Sales S 25,000,000 25,000,000 25,000,000   Variable expenses:      Manufacturing 11,250,000 11,250,000 11,250,000      Commissions (15%, 20%, 7.5%) 3,750,000 5,000,000 1,875,000   Total variable expenses 15,000,000 16,250,000 65 13,125,000 52.5   Contribution margin 10,000,000 8,750,000 11,875,000 CM ratio CM/Sales*100 A 40.0 35.0 47.5   Fixed expenses:      Manufacturing overhead 3,500,000 3,500,000 3,500,000      Marketing 175,000 175,000 3767500 (17500+3750000)      Administrative 2,160,000 2,160,000 2,045,000      Interest 875000 875,000 875,000   Total fixed expenses 6,710,000 6,710,000 10,187,500   Income before income taxes 3,290,000 2,040,000 1,687,500   Income taxes (30%) 987,000 612,000 506,250   Net income 2,303,000 1,428,000 1,181,250 ans 1 Breakeven point Fixed cost/CM ratio 16775000 19171429 21447368 6710000/.4 6710000/.35 10187500/.475 ans 2 Sales=(Income before taxes+Fixed exp)/CM ratio (3290000+6710000)/.35 28571429 ans 2 ans 3 we need to equlaise the sales volume S= Total sales volume .65s+6710000=.525s+10187500 .65-.525=10187500-6710000 27820000 ans 4 15% comission 20% commission own sales force Contrubution Margin a 10,000,000 8,750,000 11,875,000 Income before taxes b 3,290,000 2,040,000 1,687,500 Degree of operating leverage a/b 7.60 12.25 14.81 If any doubt please comment

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