Pittman Company is a small but growing manutacturer o telecommunications equipme
ID: 2601849 • Letter: P
Question
Pittman Company is a small but growing manutacturer o 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 18% 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 Manufacturing expenses S 19,600,000 $ 7,800,000 Fixed overhead 2,820,000 10,620,000 Gross margin Selling and administrative expenses: 8,980,000 3,528,000 240,000 Commissions to agents Fixed marketing expenses Fixed administrative expenses 2,400,000 6.168,000 Net operating income Fixed interest expenses S 2,812,000 660,000 Income before income taxes Income taxes (40%) 2.152,000 860,800 Net income 1,291,200 Primarily depreciation on storage facilitiesExplanation / Answer
Part 1 (a) agent's commission rate remains unchanged at 18% sales 19600000 variable expenses: manufacturing 7800000 commission (18% of sales) 3528000 total variable expense 11328000 contributioin margin 8272000 fixed exepnses: manufacturing overhead 2820000 marketing 240000 administrative 2400000 interest 660000 total fixed expenses 6120000 income before taxes 2152000 income taxes 860800 net income 1291200 dollar sales to breakeven = fixed expenses/contribution margin ratio = 6120000/(8272000/19600000) = 14500967 Part 1 (b) agent's commission rate remains unchanged at 23% sales 19600000 variable expenses: manufacturing 7800000 commission (23% of sales) 4508000 total variable expense 12308000 contributioin margin 7292000 fixed exepnses: manufacturing overhead 2820000 marketing 240000 administrative 2400000 interest 660000 total fixed expenses 6120000 income before taxes 1172000 income taxes 468800 net income 703200 dollar sales to breakeven = fixed expenses/contribution margin ratio = 6120000/(7292000/19600000) = 16449808 Part 1 (c) company employs its owns sales force sales 19600000 variable expenses: manufacturing 7800000 commission (7.6% of sales) 1489600 total variable expense 9289600 contributioin margin 10310400 fixed exepnses: manufacturing overhead 2820000 marketing 3768000 administrative 2265000 interest 660000 total fixed expenses 9513000 income before taxes 797400 income taxes 318960 net income 478440 dollar sales to breakeven = fixed expenses/contribution margin ratio = 9513000/(10310400/19600000) = 18084148 PART 2 dollar sales to attain target = (target income before taxes)+ fixed expenses/CM ratio = (1172000+6120000)/(7292000/19600000) = 19600000 PART 3 X = total sales revenue (12308000/19600000)X+6120000 = (9289600/19600000)X+9513000 0.63X+6120000 = 0.47+9513000 0.63X-0.47X = 9513000-6120000 0.16X = 3393000 X = 3393000/0.16 = 21206250 PART 4 DOL = contribution margin/income before taxes a 8272000/2152000= 3.84 b 7292000/1172000 = 6.22 c 10310400/797400 = 12.93