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:
Budgeted Income Statement
For the Year Ended December 31
Sales $ 19,900,000
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:
Sales manager $ 230,000
Travel and entertainment 920,000
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.�
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.)
The agents� commission rate remains unchanged at 19%.
The agents� commission rate is increased to 24%.
The company employs its own sales force.
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.)
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
Q: Explain what is meant by the term management by exception. What is the relationship between the proc...
A: Management by exception: Under this style of management, employees are allowed to take decisions rel...
Q: Exercise 15-1During its first year of operations, Indigo Corporation had the following transactions ...
A: (a) Preparation of the journal entries for these transactions, assuming that the common stock has a ...
Q: Tim used his 2015 F-150 pickup truck to meet with clients and for other business needs. The truck w...
A: Assuming, the trucks driven 15,473 miles during the year 2018 instead of year 2016, and 3,541 miles ...
Q: How I recorded the following transactions in general journal for BM, Inc. Include with a brief expla...
A: Transaction 1:Cash is a current asset, and it is increased. Therefore, debit cash account for $360,0...
Q: Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For it...
A: Activity-based costing (ABC): The costing method which allocates overheads to the products based on ...
Q: I attempted this problem and tried to do the company's statement of cost of goods manufactured for d...
A: Statement of cost of goods manufactured: It is a statement which reports the detailed cost breakup o...
Q: If I have a machine that I purchased for $50,000. I'be recorded depreciation of $28,000. I sell the ...
A: Book value of an asset is the Purchase price of the asset less accumulated depreciation. when the ma...
Q: Walt Bach Company has accumulated the following budget data for the year 2019. Sales: 40000 units, ...
A: Cost of goods sold alludes to the immediate costs inferable from the generation of the goods sold in...
Q: Woh Che Co. has four departments: materials, personnel, manufacturing, and packaging. In a recent mo...
A: Based on the given information allocate the indirect expenses to each of the department.Allocation o...