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3. Determine the dollar sales at which net Income would be equal regardless of whether Pittman Company sells through agents (at a 20% commission rate) or employs Its own sales force.

3. Determine the dollar sales at which net Income would be equal regardless of whether Pittman Company sells through agents (at a 20% commission rate) or employs Its own sales force.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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I only need the answer for the required 3 which is the volume of sales (in dollars)

Pittman Company Is a small but growlng manufacturer of telecommunications equipment. The company has no sales force of Its own; rather, It relles completely on Independent sales agents to market its products. These agents are pald a sales commission of 15% for all Items sold. Barbara Cheney, Pittman's controller, has Just prepared the company's budgeted Income statement for next year as follows: Pittman Company Budgeted Income statement For the Year Ended December 31 Sales $ 18,580,000 Manufacturing expenses: Variable $ 8,325,000 2,590,e00 Fixed overhead 10,915,000 7,585,000 Gross margin Selling and administrative expenses: Commissions to agents Fixed marketing expenses Fixed administrative expenses 2,775,e00 129, 500* 1,900,e00 4,804,500 Net operating income Fixed interest expenses 2,780,500 647,500 2,133,000 639,900 Income before income taxes Income taxes (30%) Net income $ 1,493,100 *Primarly depreclation on storage facılitles. 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 paylng for advertising, travel, and the other costs of promotlon, there's nothing left over for profit," replied Barbara. "I say it's just plaln 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," sald Barbara. "Several companies we know about pay a 7.5% commission to thelr 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 $2,775,000 per year, but that would be more than offset by the $3,700,000 (20% x $18,500,000) that we would avold on agents' commissions." The breakdown of the $2,775,000 cost follows: Salaries: $ 115,625 693,750 462, 500 1,503,125 $ 2,775,000 Sales manager Salespersons Travel and entertainment Advertising Total
Transcribed Image Text:Pittman Company Is a small but growlng manufacturer of telecommunications equipment. The company has no sales force of Its own; rather, It relles completely on Independent sales agents to market its products. These agents are pald a sales commission of 15% for all Items sold. Barbara Cheney, Pittman's controller, has Just prepared the company's budgeted Income statement for next year as follows: Pittman Company Budgeted Income statement For the Year Ended December 31 Sales $ 18,580,000 Manufacturing expenses: Variable $ 8,325,000 2,590,e00 Fixed overhead 10,915,000 7,585,000 Gross margin Selling and administrative expenses: Commissions to agents Fixed marketing expenses Fixed administrative expenses 2,775,e00 129, 500* 1,900,e00 4,804,500 Net operating income Fixed interest expenses 2,780,500 647,500 2,133,000 639,900 Income before income taxes Income taxes (30%) Net income $ 1,493,100 *Primarly depreclation on storage facılitles. 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 paylng for advertising, travel, and the other costs of promotlon, there's nothing left over for profit," replied Barbara. "I say it's just plaln 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," sald Barbara. "Several companies we know about pay a 7.5% commission to thelr 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 $2,775,000 per year, but that would be more than offset by the $3,700,000 (20% x $18,500,000) that we would avold on agents' commissions." The breakdown of the $2,775,000 cost follows: Salaries: $ 115,625 693,750 462, 500 1,503,125 $ 2,775,000 Sales manager Salespersons Travel and entertainment Advertising Total
The breakdown of the $2,775,000 cost follows: Salaries: sales manager Salespersons Travel and entertainment $ 115,625 693,750 462,500 1,503,125 Advertising Total $ 2,775,000 "Super," replied Karl. "And I noticed that the $2,775,000 equals what we're paying the agents under the old 15% commission rate." "It's even better than that," explained Barbara. "We can actually save $85,100 a year because that's what we're paylng our auditors to check out the agents' reports. So our overall administrative expenses would be less." "Pull all of these numbers together and we'll show them to the executive committee tomorrow," sald Karl. "With the approval of the committee, we can move on the matter Immediately." Requlred: 1. Compute Pittman Company's break-even polnt In dollar sales for next year assuming: a. The agents' commission rate remalns unchanged at 15%. b. The agents' commission rate is Increased to 20%. c. The company employs Its own sales force. 2. Assume that Pittman Company decides to continue selling through agents and pays the 20% commission rate. Determine the dollar sales that would be required to generate the same net Income as contalned In the budgeted Income statement for next year. 3. Determine the dollar sales at which net Income would be equal regardless of whether Pittman Company sells through agents (at a 20% commisslon rate) or employs Its own sales force. 4. Compute the degree of operating leverage that the company would expect to have at the end of next year assuming: a. The agents' commission rate remalns unchanged at 15%. b. The agents' commission rate is Increased to 20%. c. The company employs Its own sales force. Use Income before Income taxes In your operating leverage computation. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Determine the dollar sales at which net income would be equal regardless of whether Pittman Company sells through agents (at a 20% commission rate) or employs its own sales force. (Do not round intermediate calculations.) Volume of sales (in dollars) $ 21,519,200 < Required 2 Required 4 >
Transcribed Image Text:The breakdown of the $2,775,000 cost follows: Salaries: sales manager Salespersons Travel and entertainment $ 115,625 693,750 462,500 1,503,125 Advertising Total $ 2,775,000 "Super," replied Karl. "And I noticed that the $2,775,000 equals what we're paying the agents under the old 15% commission rate." "It's even better than that," explained Barbara. "We can actually save $85,100 a year because that's what we're paylng our auditors to check out the agents' reports. So our overall administrative expenses would be less." "Pull all of these numbers together and we'll show them to the executive committee tomorrow," sald Karl. "With the approval of the committee, we can move on the matter Immediately." Requlred: 1. Compute Pittman Company's break-even polnt In dollar sales for next year assuming: a. The agents' commission rate remalns unchanged at 15%. b. The agents' commission rate is Increased to 20%. c. The company employs Its own sales force. 2. Assume that Pittman Company decides to continue selling through agents and pays the 20% commission rate. Determine the dollar sales that would be required to generate the same net Income as contalned In the budgeted Income statement for next year. 3. Determine the dollar sales at which net Income would be equal regardless of whether Pittman Company sells through agents (at a 20% commisslon rate) or employs Its own sales force. 4. Compute the degree of operating leverage that the company would expect to have at the end of next year assuming: a. The agents' commission rate remalns unchanged at 15%. b. The agents' commission rate is Increased to 20%. c. The company employs Its own sales force. Use Income before Income taxes In your operating leverage computation. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Determine the dollar sales at which net income would be equal regardless of whether Pittman Company sells through agents (at a 20% commission rate) or employs its own sales force. (Do not round intermediate calculations.) Volume of sales (in dollars) $ 21,519,200 < Required 2 Required 4 >
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