Management Accounting
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 marketing costs | 120000 | | Fixed administrative costs | 1800000 | 4320000 | Net operating income | | 2140000 | Fixed interest cost | | 540000 | Income before income taxes | | 1600000 | Income Taxes 30% | | 480000 | Net income | | 1120000 |
Scenario:
The sales agents want sales commissions increased to 20%, this will caused the commission to agents would increase to $3,200,000 (20%X $16,000,000).
The management of Pittman Company suggested to employ company’s sales force and incurred $2,400,000 fixed costs for the sales force. Besides Pittman Company would also save $75,000 a year because no need to pay the audit firm for check out the agent reports, so the overall administrative costs would be less.
Question: 1. Compute Pittman Company’s break-even point in sales dollars for next year assuming: a. The agent’s commission rate remains unchanged at 15%. b. The agent’s commission rate is increased to 20%. c. The company employ its own sales force. 2. Assume that Pittman Company decides to continue selling through agents and pays the 20% commission rate. Determined the volume of sales that would be required to generate the same net income as contained in the budgeted
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 marketing costs | 120000 | | Fixed administrative costs | 1800000 | 4320000 | Net operating income | | 2140000 | Fixed interest cost | | 540000 | Income before income taxes | | 1600000 | Income Taxes 30% | | 480000 | Net income | | 1120000 |
Scenario:
The sales agents want sales commissions increased to 20%, this will caused the commission to agents would increase to $3,200,000 (20%X $16,000,000).
The management of Pittman Company suggested to employ company’s sales force and incurred $2,400,000 fixed costs for the sales force. Besides Pittman Company would also save $75,000 a year because no need to pay the audit firm for check out the agent reports, so the overall administrative costs would be less.
Question: 1. Compute Pittman Company’s break-even point in sales dollars for next year assuming: a. The agent’s commission rate remains unchanged at 15%. b. The agent’s commission rate is increased to 20%. c. The company employ its own sales force. 2. Assume that Pittman Company decides to continue selling through agents and pays the 20% commission rate. Determined the volume of sales that would be required to generate the same net income as contained in the budgeted