Accounting Assignment: CVP Project Data
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 items sold.
Karen, Pittman's controller just prepared the company's budgeted income statement for next year. The statement follows:
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PITTMAN COMPANY
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BUDGETED INCOME STATEMENT
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FOR THE YEAR ENDED DECEMBER 31, 2017
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SALES
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$16,000,000
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MANUFACTURING COSTS:
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VARIABLE
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$7,200,000
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FIXED
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2,340,000
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9,540,000
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GROSS MARGIN
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6,460,000
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SELLING & ADMIN COSTS:
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COMMISSION TO AGENTS
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2,400,000
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FIXED MARKETING COSTS
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120,000*
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FIXED ADMIN COSTS
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1,800,000
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4,320,000
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NET OPERATING INCOME
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2,140,000
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*All depreciation on storage facilities.
As Karen handed the statement to Mitt Romney, Pittman's president, she commented, " I used the agents' 15% commission rate in completing the statement. But we've just learned that the agents refuse to handle selling our product next year unless we increase the commission rate to 20%."
Mitt replied "How can they possibly defend a 20% commission rate? And I say it's time we fire those guys and get our own sales force."
Karen said "We can hire our own sales staff and pay them 7.5% commission, along with a small salary. Of course, we would have to handle all promotion costs too. We figure our fixed costs would increase by $2,500,000 per year."
The breakdown of the $2,500,000 cost figure is as follows:
Salaries:
Sales manager $ 100,000
Salespersons 700,000
Travel and Entertainment 400,000
Advertising 1,300,000
Total $ 2,500,000
Required:
Compute Pittman's break-even point in sales dollars for next year assuming:
a. that the agents commission rate remains unchanged at 15%
b. that the agents commission rate is increased to 20%
c. that the company employs its own sales force.