Question

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 sales commission of 15% for all items sold. Barbara Cheney, Pittman's controller, has just prepared the company's budgeted income statement for next year as follows: $ 17,000,000 10,030,000 6,970,000 Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses: Variable $ 7,650,000 Fixed overhead 2,380,000 Gross margin Selling and administrative expenses: Commissions to agents 2,550,000 Fixed marketing expenses 119,000* Fixed administrative expenses 1,840,000 Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) Net income 4,509,000 2,461,000 595,000 1,866,000 559,800 1,306,200 $ *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%."
I only need help with requirements 2 and 3, not 1 and 4. I can't figure out the breakeven points. Thank you!

Answer 1

Calculation of Contribution Margin Ratio Scenario [a] Scenario [b] Scenario [c] Own Sales force i.e (Commission 7.5%) 17,000,000 Commission 15% 17,000,000 Commission 20% 17,000,000 Sales (i) Less: Variable expenses Manufacturing expense Sales commission ( 15%, 20%, 7.5%) Contribution Margin (ii) 7,650,000 2,550,000 6,800,000 7,650,000 3,400,000 5,950,000 7,650,000 1,275,000 8,075,000 Contribution Margin Ratio (iii) (Contribution Margin / Sales) 40.00% (6,800,000 / 17,000,000) 35.00% (5,950,000 / 17,000,000) 47.50% (8,075,000 / 17,000,000) Fixed Expenses Fixed manufacturing cost Fixed Marketing expenses Fixed administrative expenses Fixed Interest expenses Total Fixed Expenses (iv) 2,380,000 119,000 1,840,000 595,000 4,934,000 2,380,000 119,000 1,840,000 595,000 4,934,000 2,380,000 2,669,000 1,761,800 595,000 7,405,800 working Notes Fixed Expenses under own sales force Fixed Marketing Expense Previous cost Add: Increase in fixed expenses Revised Fixed Marketing Expenses 119,000 2,550,000 2,669,000 Fixed Administrative expenses Previous cost Less: Saving of paying to audit firm Revised Fixed Administrative expenses 1,840,000 78,200 1,761,800

2) Desired Sales to achieve = Fixed Expenses Desired profit to achieve Contribution Margin Ratio (Fixed Expenses + Desired Profit before taxes) Contributio Margin Ratio 4,934,000 1,866,000 35.00% Desired sales to achieve (4,934,000 + 1,866,000) 35.00% 19,428,571 19,428,571 Volume Sales (in dollars) 3) This has to be solve by the equation method Let us assume the total sales revenue is X CM Ratio in at 20% commission Variable Cost perentage of sales (100 -35.00%) CM Ratio in at Own sales force Variable Cost perentage of sales (100 -47.50%) 0.3500 0.6500 0.4750 0.5250 We need to find out cost before the income taxes under the two plans are equal Total Cost Structure Variable Cost + Fixed Cost Cost structure at 20% commission 65.00%X + 4,934,000 Cost structure at Own sales force 52.50%X + 7,405,800 .650 X + 4,934,000 = .525X + 7,405,800 .650X - .525X = 7,405,800 - 4,934,000 .125X = 2,471,800 X = 2,471,800 / .125 X = 19,774,400 Volume Sales (in dollars) ollars) 19,774,400