Managerial Accounting for Managers Case 4-33 Essay examples

Decent Essays
Textbook case:
Managerial Accounting for Managers, 2nd edition Noreen, Brewer and Garrison (McGraw-Hill/Irwin, 2008).
Case 4-33 Cost Structure; Target profit and Break-Even Analysis

Contribution Income Statement for all three scenarios:

15% commission 20% commission Own sales force Sales $16,000,000 $16,000,000 $16,000,000
Variable manuf. cost $7,200,000 $7,200,000 $7,200,000
Commissions $2,400,000 $3,200,000 $1,200,000
-Tot. variable cost ($9,600,000) ($10,400,000) ($8,400,000) Contribution margin $6,400,000 $5,600,000 $7,600,000
Fixed overhead $2,340,000 $2,340,000 $2,340,000
Fixed marketing $120,000 $120,000 $2,520,000
Fixed administrating $1,800,000
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In addition, Pittman would also take over the travel, entertainment and advertising costs of $1.7 million. This decision would also decrease administrating costs by $75,000.
The president of Pittman is Karl Vecci received the above information from Barbara Cheney, Pittman’s controller and has asked her to put together all numbers necessary in order to make a healthy decision. This case illustrates a simplified version of a real-world situation where executive committees rely on managerial accounting information to make relevant decisions derived from cost changes. A contribution income statement, break-even points, target sales volume and operating leverage calculation are illustrated above and are all necessary in order to make an informed decision that will maximize Pitman’s bottom line in the short and long run. My recommendation is for Pittman to keep the sales agency for now, even with the increased commission of 20% because if would still generate $227,500 more income (at the assumed sales level of $16 million. The BE analysis also suggest that Pittman should accept the agency 20% terms since it can break-even at about 13.7 million rather than 15 million and therefore have a higher margin of safety of 2.3 million and with it, lower risk. It is however important to reevaluate this decision the following year because Pittman is a growing company and its sales levels would most likely increase. If, and when, the sales
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