1212121 Essay

618 Words Mar 7th, 2012 3 Pages
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 items sold.
Barbara Cheney, Pittman's controller, has just prepared the following budgeted income statement for next year: http://textflow.mcgraw-hill.com//figures/0070698236/bre02177_tb1135.jpg As Barbara handed the statement to Karl Vecci, Pittman's president, she commented, “I went ahead and used the agents' 15% commission rate in completing these statements, but we've just learned that they refuse to handle our products next year unless we increase the
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“We can actually save $75,000 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:

Compute Pittman Company's break-even point in sales dollars for next year, assuming:

That the agents' commission rate remains unchanged at 15%

That the agents' commission rate is increased to 20%

That the company employs its own sales force

Assume that Pittman Company decides to continue selling through agents and pays the 20% 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.

Determine the volume of 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.

Compute the degree of operating leverage that the company would expect to have on December 31 at the end of next year, assuming:

That the agents' commission rate remains unchanged at 15%

That the agents' commission rate is increased to 20%

That the company employs its own sales force

Use income before income taxes in your operating leverage computation.

On the basis of the data in parts

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