Ptman Company is a small but growing manufacturer of telecommunications equipmen

Question

Ptman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of ts own rather, t relies complete on independen sales a ents to market its pro ucts. These a ents are paid a sales commission of 15% for all Iterns sold. Barbara Cheney, Pittman's controller, has just prepared the company's budgeted income statement for next year as follows Budgeted Income Statesent Sales Hanufacturing expenses: 18,500,e00 Variable Fixed overhead 8,325,00e 2,598, 1,915,000 7,S85,eee Gross margin Selling and administrative expenses: Commissions to agents Fixed marketing expenses Fixed administrative expenses 2,775,009 129,500* 1,900,090 Net operating income Fixed interest expenses Income before income taxes Income taxes (3ex) Net income 4,8e4,se8 2,780,58e 647,500 2,133,00e 639,900 $ 1.493,100 "Primartly depreciation on storage facilities. As Barbara handed the statement to Karl commission rate in completing these stotements, but we've just learned that they refuse to hande our products next year unless we vecc?, Pittman's president, she commented, "I went ahead and used the agents' 15% increase the commission rate to 20% Thar's the last strew. Kar repled angn y. Those agents have been demanding more and more, and this time they've gone too for How can they possibly defend a 20% commission rate?" They claim that after paying for advertsing, trave. and the other costs of promotion, there's nothing left over for profit; repilied Barbara. 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 a1? e Several companies we know about pay a 75% commission to their own sales eo along with a small salary Of course, we would have to nandle all promotion costs, too. We figure our fixed expenses would increose by $2775.000 per year, but that would be more than omset by the S3700000 20% . s8.500000, that we would avoid on agents commissions. said Barbara e already worked them up

Explanation / Answer

Answer Commission 15% Commission 20% Own Sale force Sales                18,500,000      18,500,000      18,500,000 Variable Costs Variable Manufacturing Expenses                    8,325,000          8,325,000          8,325,000 Commission to agents                    2,775,000          3,700,000                         -   Total Variable Costs                  11,100,000        12,025,000          8,325,000 Contribution Margin                    7,400,000          6,475,000        10,175,000 CM Fixed Costs: Fixed manufacturing overhead                    2,590,000          2,590,000          2,590,000 Fixed marketing expenses                        129,500              129,500              129,500 Fixed administrative expenses                    1,900,000          1,900,000          1,900,000 Fixed interest expenses                        647,500              647,500              647,500 Fixed selling expenses                                   -                           -            2,775,000 Total Fixed Costs                    5,267,000          5,267,000          8,042,000 Income before taxes                    2,133,000          1,208,000          2,133,000 Contribution Margin Ratio= 40.000% 35.000% 55.000% Break even point in dollar sales=                  13,167,500        15,048,571        14,621,818 2) Dollar sales to attain target = (Fixed expenses + Target income before taxes) / CM Ratio ROUND((5267000+2133000)/0.35,0) = 21142857 3) x= total sales revenue .65x+5267000= .45x+8042000 0.2x= 2775000 x= 13875000 4) Degree of operating leverage = CM/net income a) 7400000/2133000                           3 b) 6475000/1208000                           5 c) 10175000/2133000                           5

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