Management Accounting

1584 WordsApr 8, 20137 Pages
Contents Summary of Case 1 Question: 2 Answer: 3 Summary of Case 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 commission of 15% of selling price for all item sold. The company’s budgeted income statement for next year follows: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales | | $16000000 | Manufacturing Costs: | | | Variable | $7200000 | | Fixed Overhead | 2340000 | 9540000 | Gross Margin | | 6460000 | Selling and Administrative Costs: | | | Commissions to agents | 2400000 | | Fixed…show more content…
The agents’ commission rate remains unchanged at 15%. Fixed Costs = 2,340,000 + 120,000 + 1,800,000 = 4,260,000 Variables Costs = 7,200,000 + 2,400,000 = 9,600,000 Contribution Margin (CM) = Sales – Variables = 16,000,000 – 9,600,000 = 6,400,000 Degree of Operating Leverage (DOL) = Contribution Margin Net Operating Income = 6,400,000 2,140,000 = 2.9906 b. The agents’ commission rate is increased to 20%. Fixed Costs = 2,340,000 + 120,000 + 1,800,000 = 4,260,000 Commission to Agents = 16,000,000 x 20% = 3,200,000 Variables Costs = 7,200,000 + 3,200,000 = 10,400,000 Contribution Margin (CM) = Sales – Variables = 16,000,000 – 10,400,000 = 5,600,000 Degree of Operating Leverage

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