Determine the level of sales needed to achieve a desired target profit. 1. Compu
ID: 2418976 • Letter: D
Question
Determine the level of sales needed to achieve a desired target profit.
1. Compute Pittman Compant's break-even point in dollar sales for the next year assuming:
a. The agents' commission rate remains unchanges at 19%
b. The agents' commission rate is increased to 24%
c. The company employs its own sales force
2.. Assume that Pittman Company decides to continue selling through agents and pays the 24% commission rate. Determine the volume of sales that would be required to generate the same net income as contained in the budgeted income statement for next year.
3. Determine the volume of sales at which net income would be equal regardless of whether Pittman Company sells through agents (at a 24% commission rate) or employs its own sales force.
4. Compute the degree of operating leverage that the company would expect to have on December 31 at the end of the year assuming:
a. The agents' commission rate remains unchanged at 19%
b. The agents' commission rate is increased to 24%
c. The company employs its own sales force
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 Manufacturing expenses: $17,200,000 $7,400,000 Variable Fixed overhead 2,500,000 9,900,000 Gross margin Selling and administrative expenses 7,300,000 3,268,000 160,000* Commissions to agents Fixed marketing expenses Fixed administrative expenses 2,000,000 5,428,000 Net operating income Fixed interest expenses $ 1,872,000 580,000 Income before income taxes Income taxes (25%) 1,292,000 323,000 Net income 969,000Explanation / Answer
7400000
* 160000+3268000 => 3428000
** 2000000 - 145000 => 1710000
Break even sales => fixed cost / contribution margin
19% Commission => 5240000 /38% => $13789874
24% Commission => 5240000 /33%=> $ 15878788
Own Force=> 8218000 /51% => $ 16113725
Answer 2
To generate the same net income of $969000, the companymust generate $1292000 in income before taxes (with a 25% effective tax rate).Therefore, with an increase in the commission rate to 24 %, the targeted sales volume would be
targeted sales => Fixed cost + target profit / Cm ratio
=> (5240000 +1292000) / 33%
Targeted sales =>$ 19793940
Answer 3
Let X=Total Sales VolumeCosts (24% Commission) = Costs (Sales Force Plan)
=> 0.67x +5240000 = 0.49x + 8218000
=> 018x = 2978000
x => $ 16544445
At a sales level of 16544445 either plan would yieldthe same net income.Below this sales level, thecommission plan would yield the largest net income; abovethis sales level, the sales force plan would yield the largestnet income.
Answer 4
Degree of operating leverage => Contribution Margin / income before taxes
19% Commission => 6532000/1292000=> 5.06
24% Commission => 5672000 / 432000 => 13.13
Own force Commission -=> 8768000 / 550000 => 15.94
Particulars 19% commission 24% Commission Own Force Sales 17200000 17200000 17200000 Less: Variable Expenses Manufacturing Variable 7400000 74000007400000
Commission 3268000 4128000 1032000 Total variable expenses 10668000 (62%) 11528000 (67%) 8432000 (49%) Contribution Margin 6532000 (38%) 5672000 (33%) 8768000 (51%) Less: Fixed Expenses Manufacturing Fixed 2500000 2500000 2500000 Interest 580000 580000 580000 Marketing 160000 160000 3428000* Administrative 2000000 2000000 1710000** Total Fixed Expenses 5240000 5240000 8218000 Income before taxes 1292000 432000 550000 Taxes (25%) 323000 108000 137500 Income after taxes 969000 324000 412500Related Questions
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