The breakdown of the \$3,675,000 cost follows:- Salaries: - Sales manager: \$153,125 - Salespersons: \$918,750- Travel and entertainment: \$612,500- Advertising: \$1,990,625**Total: \$3,675,000**---“Super,” replied Karl. “And I noticed that the \$3,675,000 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 \$112,700 a year because that’s what we’re paying 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,” said Karl. “With the approval of the committee, we can move on the matter immediately.”---**Required:**1. Compute Pittman Company’s break-even point in dollar sales for next year assuming: a. The agents’ commission rate remains 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 contained 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% commission 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 remains 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. **Pittman Company Budgeted Income Statement Analysis**Pittman Company, a manufacturer of telecommunications equipment, relies exclusively on independent sales agents to market its products. These agents receive a 15% commission on sales. Below is the company's budgeted income statement for the coming year.**Budgeted Income Statement for the Year Ended December 31**- **Sales:** $24,500,000- **Manufacturing Expenses:** - *Variable:* $11,025,800 - *Fixed Overhead:* $3,430,000 - **Total Manufacturing Expenses:** $14,455,800- **Gross Margin:** $10,045,000- **Selling and Administrative Expenses:** - Commissions to agents: $3,675,000 - Fixed marketing expenses: $171,500 - Fixed administrative expenses*: $2,140,000 - **Total Selling and Administrative Expenses:** $5,986,500- **Net Operating Income:** $4,058,500- **Fixed Interest Expenses:** $857,500- **Income Before Income Taxes:** $3,201,000- **Income Taxes (30%):** $960,300- **Net Income:** $2,240,700(*Primarily depreciation on storage facilities.)**Discussion and Analysis:**During a review, Barbara Cheney, Pittman’s controller, presented the statement to Karl Vecci, the company’s president. The sales agents demanded an increase in commission from 15% to 20%. Pittman could alternatively employ an internal sales force. Initial estimates for employing a sales force include costs for salaries, travel, and entertainment, totaling $3,675,000 annually. **Breakdown of Sales Force Costs:**- **Salaries:** - Sales manager: $135,125 - Salespersons: $1,922,875- **Travel and Entertainment:** $612,500- **Advertising:** $1,004,625- **Total:** $3,675,000The analysis revealed that hiring a sales force could be more cost-effective than paying agents a 20% commission. An in-house force could save $112,700, also reducing administrative oversight expenses.**Conclusion:**Karl suggested presenting these findings to the executive committee for a decision on whether to continue with the sales agents or shift to an internal sales force

Operating Leverage Operating leverage is a cost-accounting method that quantifies how much a…

The breakdown of the $3,675,000 cost follows: Salaries: Sales manager Salespersons Travel and entertainment Advertising Total $ 153,125 918,750 612,500 1,990, 625 $3,675,000 "Super," replied Karl. "And I noticed that the $3,675,000 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 $112,700 a year because that's what we're paying 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," said Karl. "With the approval of the committee, we can move on the matter immediately." Required: 1. Compute Pittman Company's break-even point in dollar sales for next year assuming: a. The agents' commission rate remains 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 contained 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% commission 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 remains 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.

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q