no sales force of ds own, rather, E reles a These agents are pad a Barbara Chene
ID: 2601820 • Letter: N
Question
no sales force of ds own, rather, E reles a These agents are pad a Barbara Cheney, Pittman's centroler, has just prepared the company's badgeled income stalement fon s or re sonof 17%for all demseld sales agents to manet tspr duty aCheney Pnna nexd year The sdatement folos Sales Manufacturing expenses $ 16,600,000 $ 7,300,000 Fiued overhead 2,420,000 9,720,000 Gross margin Seling and admnistr atve expenses 6 880000 Commissions to agentr 2822,000 140.000 Fxed admiistr ative expenses 900,000 4862.000 Net operating ncome Fued interest expenses 2018,000 560,000 Income before income taxes income taes (40%) 1458.000 583 200 Net income 874800 "Prmarly depreciation on storage facities As Barbara handed he statement to Kan veco Peman s pres dent.he ormerted·went ahead and used the agents 17% commsson 'ate n completing these statements, bdeve ust earned tey refuse to handie our products nent year unless we increase he commisson rate to Thats the lsta Karl repied angriy "Those agents have been demanding more and more, and is ture they ve gone too tar now carney posstly defend a 22% connsson 'ate? They cdaim that after paying for advertising, ravel and the oher costs of promotion, theres nothing le over for proft repled Barbara I say t's just plan robbery" retorted Kart And I also say it's ime we dumped those guys and got cur own sales foroe. Can you get your peopie to work up some cost Sgures for us to look a Vieveaready worted Vern up , sad Barbara sever al companes we inw abot pay a 77% commission to their own salespeople, abng with a smal salary Of eourse we wpuld have to hande all promotion costs, too. We figure cur fxed espenses would increase by $2 822 000 per year but that wauld be more than offset by the S3 C62 000 (22%·516 600 000, that we wouk, avod on agents commissons The breakdowe of the $2 822,000 cost ollows S 120,000 1.522.000 2 822.000 Saies manager Salespersons Advertising Total Super repled Karl And I noticed hat the 52 822,000 t what we're paying the agents under the Old 17% cornasion rane its even bether than that esplaned Barbara "We can athually save $85 800 a year because thats what were having to pay the auciting fanm now to check ost the agents repoets So our overall antave ots would be less P il al of these numbers together and ugV how them the executive CO-nttee tomorro " " said Karl with the approval oren corrmtlee wo can mon on th* matter mmediately 1 Compute Pittman Company's break-ever point in dolar sales for neit year assuming (Enter your answer in whole dollars and not in thousanas. Round CM ratio to 3 decimal places and final answer to the nearest delar amount) a The agents comission rate remans unthanged at t 7% b The agents commsson rate is rcrpasecto 22%Explanation / Answer
Before proceeding with the solution, it is helpful first to restructure the data into contribution format for each of the three alternatives. (The data in the statements below are in thousands.) 17%Commission 22% Commission Own Sales Force Sales $16,600 100% $16,600 100% $16,600.00 100.00% Variable expenses: Manufacturing 7,300 7,300 7,300.00 Commissions (17%, 22%, 7.7%) 2,822 3,652 1,278.20 Total variable expenses 10,122 61.0% 10,952 66.0% 8,578.20 51.7% Contribution margin 6,478 39.0% 5,648 34.0% 8,021.8 48.3% Fixed expenses: Manufacturing overhead 2,420 2,420 2,420.00 Marketing 140 140 2,962.0 * Administrative 1,900 1,900 1,815.0 ** Interest 560 560 560 Total fixed expenses 5,020 5,020 7,757.00 Income before income taxes 1,458 628 264.8 Income taxes (40%) 583.2 251.2 105.92 Net income $874.80 $376.80 $158.88 *$140,000 + $2,822,000 = $2,962,000 **$1,900,000 - $85,000 = $1,815,000 1 When the income before taxes is zero, income taxes will also be zero and net income will be zero. Therefore, the break-even calculations can be based on the income before taxes. a Break-even point in dollar sales if the commission remains 17%: Dollar sales to break even = Fixed expenses ÷ CM ratio = $5,020,000 ÷ 0.39 = $12,871,795 b Break-even point in dollar sales if the commission increases to 22%: Dollar sales to break even = Fixed expenses ÷ CM ratio = $5,020,000 ÷ 0.34 = $14,764,706 c Break-even point in dollar sales if the company employs its own sales force: Dollar sales to break even = Fixed expenses ÷ CM ratio = $7,757,000 ÷ 0.483 = $16,060,041 2 In order to generate a $874,800 net income, the company must generate $1,458,000 in income before taxes. Therefore, Dollar sales to attain target = (Target income before taxes + Fixed expenses) ÷ CM ratio ($1,458,000+$5,020,000) ÷ 0.34 $6,478,000 ÷ 0.34 = $19,052,941 3 To determine the volume of sales at which net income would be equal under either the 22% commission plan or the company sales force plan, we find the volume of sales where costs before income taxes under the two plans are equal. See below X = Total sales revenue 0.66X + $5,020,000 = 0.517X + $7,757,000 0.143X = $2,737,000 X = $2,737,000 ÷ 0.143 X = $19,139,860 Thus, at a sales level of $19,139,860 either plan would yield the same income before taxes and net income. Below this sales level, the commission plan would yield the largest net income; above this sales level, the sales force plan would yield the largest net income. 4 a., b., and c. 17% Commission 22% Commission Own Sales Force Contribution margin (Part 1) (x) $ 6,478,000 $ 5,648,000 $ 8,021,800 Income before taxes (Part 1) (y) $ 1,458,000 $ 628,000 $ 264,800 Degree of operating leverage: (X) ÷ (Y) 4.44 8.99 30.29
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.