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Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items sold. Barbara Cheney, Pittman's controller, 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 Manufacturing expenses: Variable $ 19,000,000 $ 8,550,000 2,660,000 11,210,000 Fixed overhead Gross margin Selling and administrative expenses: Commissions to agents 7,790,000 2,850,000 Fixed marketing expenses 133,000* Fixed administrative expenses 1,920,000 4,903,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) 2,887,000 665,000 2,222,000 666,600 $ 1,555,400 Net income *Primarily depreciation on storage facilities. 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 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 after paying for advertising, travel, and the other costs of promotion, there's nothing left over for profit," replied Barbara. "That's ridiculous," 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?"

Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items sold. Barbara Cheney, Pittman's controller, 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 Manufacturing expenses: Variable $ 19,000,000 $ 8,550,000 2,660,000 11,210,000 Fixed overhead Gross margin Selling and administrative expenses: Commissions to agents 7,790,000 2,850,000 Fixed marketing expenses 133,000* Fixed administrative expenses 1,920,000 4,903,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) 2,887,000 665,000 2,222,000 666,600 $ 1,555,400 Net income *Primarily depreciation on storage facilities. 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 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 after paying for advertising, travel, and the other costs of promotion, there's nothing left over for profit," replied Barbara. "That's ridiculous," 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?"

Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter8: Budgeting For Planning And Control
Section: Chapter Questions
Problem 10CE: Coral Seas Jewelry Company makes and sells costume jewelry. For the coming year, Coral Seas expects...
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Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items sold. Barbara Cheney, Pittman's controller, 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 Manufacturing expenses: Variable $ 19,000,000 $ 8,550,000 2,660,000 11,210,000 Fixed overhead Gross margin Selling and administrative expenses: Commissions to agents 7,790,000 2,850,000 Fixed marketing expenses 133,000* Fixed administrative expenses 1,920,000 4,903,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) 2,887,000 665,000 2,222,000 666,600 $ 1,555,400 Net income *Primarily depreciation on storage facilities. 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 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 after paying for advertising, travel, and the other costs of promotion, there's nothing left over for profit," replied Barbara. "That's ridiculous," 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?"
Transcribed Image Text:Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items sold. Barbara Cheney, Pittman's controller, 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 Manufacturing expenses: Variable $ 19,000,000 $ 8,550,000 2,660,000 11,210,000 Fixed overhead Gross margin Selling and administrative expenses: Commissions to agents 7,790,000 2,850,000 Fixed marketing expenses 133,000* Fixed administrative expenses 1,920,000 4,903,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) 2,887,000 665,000 2,222,000 666,600 $ 1,555,400 Net income *Primarily depreciation on storage facilities. 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 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 after paying for advertising, travel, and the other costs of promotion, there's nothing left over for profit," replied Barbara. "That's ridiculous," 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?"
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