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 sales commission of 19% for all items sold.Barbara Cheney, Pittman�s controller, has just prepared the company�s budgeted income statement for next year. The statement follows:Pittman CompanyBudgeted Income StatementFor the Year Ended December 31Sales $ 19,900,000Manufacturing expenses:Variable $ 7,850,000Fixed overhead 2,860,000 10,710,000Gross margin 9,190,000Selling and administrative expenses:Commissions to agents 3,781,000Fixed marketing expenses 250,000*Fixed administrative expenses 2,450,000 6,481,000Net operating income $ 2,709,000Fixed interest expenses 670,000Income before income taxes 2,039,000Income taxes (20%) 407,800Net income 1,631,200*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� 19% 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 24%.��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 24% commission rate?��They claim that after paying for advertising, travel, and the other costs of promotion, there�s nothing left over for profit,� replied Barbara.�I say it�s just plain 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,� said Barbara. �Several companies we know about pay a 7.7% commission to their 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 $3,781,000 per year, but that would be more than offset by the $4,776,000 (24% � $19,900,000) that we would avoid on agents� commissions.�The breakdown of the $3,781,000 cost follows:Salaries:Sales manager $ 230,000Salespersons 1,250,000Travel and entertainment 920,000Advertising 1,381,000Total $ 3,781,000�Super,� replied Karl. �And I noticed that the $3,781,000 is just what we�re paying the agents under the old 19% commission rate.��It�s even better than that,� explained Barbara. �We can actually save $140,000 a year because that�s what we�re having to pay the auditing firm now to check out the agents� reports. So our overall administrative costs 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: (Enter your answer in whole dollars and not in thousands. Round CM ratio to 3 decimal places and final answer to the nearest dollar amount.)a.The agents� commission rate remains unchanged at 19%.b.The agents� commission rate is increased to 24%.c.The company employs its own sales force.2.Assume that Pittman Company decides to continue selling through agents and pays the 24% commission rate. Determine the volume of sales that would be required to generate the same net income as contained in the budgeted income statement for next year. (Enter your answer in whole dollars and not in thousands. Round CM ratio to 3 decimal places.)3.Determine the volume of sales at which net income would be equal regardless of whether Pittman Company sells through agents (at a 24% commission rate) or employs its own sales force. (Enter your answer in whole dollars and not in thousands. Round CM ratio to 3 decimal places.)PLEASE SHOW HELP WITH STEPS :) thanks in advance

Question
Asked Feb 13, 2019
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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 completely on independent sales agents to market its products. These agents are paid a sales commission of 19% for all items sold.

Barbara Cheney, Pittman�s controller, has just prepared the company�s budgeted income statement for next year. The statement follows:

Pittman Company
Budgeted Income Statement
For the Year Ended December 31
Sales $ 19,900,000
Manufacturing expenses:
Variable $ 7,850,000
Fixed overhead 2,860,000 10,710,000
Gross margin 9,190,000
Selling and administrative expenses:
Commissions to agents 3,781,000
Fixed marketing expenses 250,000*
Fixed administrative expenses 2,450,000 6,481,000
Net operating income $ 2,709,000
Fixed interest expenses 670,000
Income before income taxes 2,039,000
Income taxes (20%) 407,800
Net income 1,631,200
*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� 19% 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 24%.�

�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 24% commission rate?�

�They claim that after paying for advertising, travel, and the other costs of promotion, there�s nothing left over for profit,� replied Barbara.

�I say it�s just plain 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,� said Barbara. �Several companies we know about pay a 7.7% commission to their 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 $3,781,000 per year, but that would be more than offset by the $4,776,000 (24% � $19,900,000) that we would avoid on agents� commissions.�

The breakdown of the $3,781,000 cost follows:

Salaries:
Sales manager $ 230,000
Salespersons 1,250,000
Travel and entertainment 920,000
Advertising 1,381,000
Total $ 3,781,000
�Super,� replied Karl. �And I noticed that the $3,781,000 is just what we�re paying the agents under the old 19% commission rate.�

�It�s even better than that,� explained Barbara. �We can actually save $140,000 a year because that�s what we�re having to pay the auditing firm now to check out the agents� reports. So our overall administrative costs 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: (Enter your answer in whole dollars and not in thousands. Round CM ratio to 3 decimal places and final answer to the nearest dollar amount.)

a.
The agents� commission rate remains unchanged at 19%.

b.
The agents� commission rate is increased to 24%.

c.
The company employs its own sales force.

2.
Assume that Pittman Company decides to continue selling through agents and pays the 24% commission rate. Determine the volume of sales that would be required to generate the same net income as contained in the budgeted income statement for next year. (Enter your answer in whole dollars and not in thousands. Round CM ratio to 3 decimal places.)

3.
Determine the volume of sales at which net income would be equal regardless of whether Pittman Company sells through agents (at a 24% commission rate) or employs its own sales force. (Enter your answer in whole dollars and not in thousands. Round CM ratio to 3 decimal places.)

PLEASE SHOW HELP WITH STEPS :) thanks in advance

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Expert Answer

Step 1

Calculation of net income under three ways as shown below:

Particulars19% CommissionWorkings24% CommissionWorkingsOwn sales forceWorkings
Sales$19,900,000 $19,900,000 $19,900,000 
Less: Variable expenses:      
Manufacturing variable costs$7,850,000 $7,850,000 $7,850,000 
Commission $3,781,000($19,900,000*19%)$4,776,000($19,900,000*24%)$1,532,300($19,900,000*7.70%)
Contribution margin$8,269,000 $7,274,000 $10,517,700 
Contribution margin ratio41.553%($8,269,000/$19,900,000)*10036.553%($7,274,000/$19,900,000)*10052.853%($10,517,700*19,900,000)*100
Less: Manufacturing overhead$2,860,000 $2,860,000 $2,860,000 
Marketing $250,000 $250,000 $4,031,000($250,000 +$3,781,000)
Administrative$2,450,000 $2,450,000 $2,310,000($2,450,0000 - $140,000)
Interest$670,000 $670,000 $670,000 
Total fixed expenses$6,230,000 $6,230,000 $9,871,000 
Income before income taxes$2,039,000 $1,044,000 $646,700 
Less: Income taxes @ 20%$407,800($2,039,000*20%)$208,800($1,044,000*20%)$129,340($646,700*20%)
Net income$1,631,200 $835,200 $517,360 
Step 2

1.a

Calculate Break even point in dollars:

 

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Step 3

1.b

Calculate break even point in dollars...

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