Pictures 1-3 was the given information and the 3 questions to the original probl
ID: 2553924 • Letter: P
Question
Pictures 1-3 was the given information and the 3 questions to the original problem and the fourth picture are the answers. Please answer the last picture about whether the company should keep the 20% commission rate or employ its own task force. Please use a lot of detail and numbers for examples I need at least 3 paragraphs for this part. Thank you!!! CASE 5-33 Cost Structure; Break-Even and Target Profit Analysis LOS-4, LOs-5, LOS- Pittman Company is a small but growing manufacturer of telecommunications equipment. 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 comamission of 15% for all items sold. The Barbara Cheney, Pittman's controller, has just prepared the company's budgeted income state- ment for next year as follows: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses: $16,000.000 Variable Fixed overhead . $7.200,000 9,540,000 6.460,000 Gross margin . , … Selling and administrative expenses Commissions to agents 2,400,000 120,000 Fixed marketing expenses 4.320,000 2,140,000 540,000 1,600,000 480,000 S 1.120,000 Fixed administrative expenses Net operating income. Fixed interest expenses. 1.800.000 Income taxes (30%) Net income 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, 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 commission rate to 20%." "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 20% 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 75% 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 $2,400,000 year, but that would be more than offset by the $3.200.000 (20% x S|6,000,000) that we would avoid on agents' commissions." per
Explanation / Answer
Answer:
The Company should use sales agents (at a 20% commission rate) instead of employ its own Sales force.
Reasons:
If sales increase by 5%
20% Commission
Own Sales Force
Sales
16,800,000
16,800,000
Contribution Margin
32.813%
45.313%
Contribution
5,512,584
7,612,584
Fixed Cost
4,800,000
7,125,000
Profit Before Income Tax
712,584
487,584
Income Tax @ 30%
213,775
146,275
Profit After Income Tax
498,809
341,309
If sales decrease by 5%
20%Commission
Own Sales Force
Sales
15,200,000
15,200,000
Contribution Margin
32.813%
45.313%
Contribution
4,987,576
6,887,576
Fixed Cost
4,800,000
7,125,000
Profit Before Income Tax
1,87,576
-2,37,424
Income Tax @ 30%
56,273
0
Profit After Income Tax
131,303
-237,427
From above we can see in both the cased profit earned after tax in higher if company use its sales agent i.e. $ 498,809 and $ 131,303 respectively against $ 341,309 and ($ 237,424).
Hence Company should use sales agents (at a 20% commission rate) instead of employ its own Sales force.
20% Commission
Own Sales Force
Sales
16,800,000
16,800,000
Contribution Margin
32.813%
45.313%
Contribution
5,512,584
7,612,584
Fixed Cost
4,800,000
7,125,000
Profit Before Income Tax
712,584
487,584
Income Tax @ 30%
213,775
146,275
Profit After Income Tax
498,809
341,309