Pittman Company is a small but growing manufacturer. The company has no sales fo

ID: 2606519 • Letter: P

Question

Pittman Company is a small but growing manufacturer. 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 15% for all items sold. Barbara, Pittman's controller, has just prepared the company's budgeted income statement for next year as follows: Pittman Company Budgeted Income Statement 31 Sales Manufacturing expenses: S 24,500,000 Variable Fixed overhead $11,025,000 3.430,000 14.455,000 10,045,000 Gross margin Selling and administrative expenses: Commissions to agents Fixed marketing expenses Fixed administrative expenses 3.675,000 171,500* Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) Net income 2,140,000 5.986.500 4,058,500 857.500 3,201,000 960.300 S 2,240,700 Primarily depreciation on storage facilities. As Barbara handed the statement to Karl, Pittman's president, she commented. 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 "That's the last straw," Karl replied angrily. "Those agents have been demanding more and rate?"* more, and this time they've gone too far. How can they possibly defend a 20% commission "They claim that after paying for advertising, travel, and the other costs of promotion, theres 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 ?"

Explanation / Answer

1. First of all we need formula to Solve The above mention questions-

Profit Volume Ratio (P/V Ratio)= Contribution / Sales

Break Even Point (In Terms of Dollars)= Fix Cost / PV Ratio

=$9800000/$24500000

=40%

=$8575000/$24500000

=35%

=$13475000/$24500000

=55%

=$5741500/40%

=$ 14353750

=$5741500/35%

=$ 16404282.71

=$5741500/55%

=$ 10439090.91

Sales to achive desired profit = Target Profit + Total Fixed Cost / Profit Volume Ratio

=$ 2240700+$5741500 / 35%

= $ 22806285.71

3. Operating Levarage = Contribution / Net Operating Income

= $9800000 / $3201000

= 3.06

Particulars Commision @ 15% Commision @ 15% Own Sale force Sales $ 24500000 $ 24500000 $ 24500000 Less; Variable Cost (A) Variable Cost $ 11025000 $ 11025000 $ 11025000 (B) Commission To Agent $ 3675000 $ 4900000 - Contribution (Sales-Variable Cost) $ 9800000 $ 8575000 $ 13475000 FIX COSTS (A) Fixed Marketing Exp $171500 $171500 $171500 (B) Fixed Admin Exp $ 2140000 $ 2140000 $ 2140000 Total Fix Cost ( A+B) $ 5741500 $ 5741500 $ 5741500 PV Ratio