** PLEASE SHOW WORKING AND ONLY DO IT IF YOU KNOW COST ACCOUNTING I HAVE HAD WRO

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** PLEASE SHOW WORKING AND ONLY DO IT IF YOU KNOW COST ACCOUNTING I HAVE HAD WRONG ANSWERS TO THIS QUESTION TWICE**

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 14% 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 $18,400,000 Manufacturing expenses 7,600,000 2,660,000 10260,000 Fixed overhead Gross margin Selling and administrative expenses 8,140,000 2,576,000 200,000 Commissions to agents Fixed marketing expenses Fixed administrative expenses 2,200,000 4976,000 Net operating income Fixed interest expenses 3,164,000 620,000 Income before income taxes Income taxes (20%) 2,544,000 508,800 Net income 2,035,200 *Primarily depreciation on storage facilities As Barbara handed the statement to Karl Vecci, Pittman's president, she commented, "l went ahead and used the agents' 14% 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 19%." 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 19% 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 "l 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 8.3% 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 $2576,000 per year, but that would be more than offset by the $3,496,000 (19% $18.400,000) that we would avoid on agents' commissions."

Explanation / Answer

Part 1)

The break even point calculation for each alternative is shown below:

__________

Part B)

The required level of sales can be calculated with the use of following formula:

Target Sales = (Fixed Cost + Income Before Taxes)/Contribution Ratio

__________

Using the information provided in the question and values calculated above, we get,

Target Sales = (5,680,000 + 2,544,000)/39.696% = $20,717,453

__________

Part C)

We will assume the total sales level as X. At this level of sales, the cost structure will be the same under the 2 alternatives. The required level of sales is calculated as follows with the use of cost structure equations for both alternatives:

(1-39.696%)*X + 5,680,000 = (1-50.396%)*X + 8,141,000

Solving for X, we get,

X = (8,141,000 - 5,680,000)/(60.304% - 49.604%) = $23,000,000

At a sales volume of $23,000,000, the net income will be same under both the alternatives.

__________

Part D)

The degree of operating leverage has been calculated with the use of following table:

14% Commission 19% Commission Own Sales Force Sales 18,400,000 18,400,000 18,400,000 Less Variable Expenses Manufacturing 7,600,000 7,600,000 7,600,000 Commissions 2,576,000 3,496,000 1,527,200 Total Variable Expenses 10,176,000 11,096,000 9,127,200 Contribution Margin 8,224,000 7,304,000 9,272,800 Less Fixed Expenses Manufacturing Overhead 2,660,000 2,660,000 2,660,000 Marketing Expenses 200,000 200,000 2,776,000 Administrative Expenses 2,200,000 2,200,000 2,085,000 Interest Expense 620,000 620,000 620,000 Total Fixed Expenses 5,680,000 5,680,000 8,141,000 Contribution Margin Ratio (Contribution/Sales*100) 44.696% 39.696% 50.396% Break Even Point (Total Fixed Expenses/Contribution Ratio) $12,708,072 $14,308,746 $16,154,059

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