Posted: November 28th, 2015
Accounting 212 – 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:
|BUDGETED INCOME STATEMENT|
|FOR THE YEAR ENDED DECEMBER 31, 2013|
|SELLING & ADMIN COSTS:|
|COMMISSION TO AGENTS||2,400,000|
|FIXED MARKETING COSTS||120,000*|
|FIXED ADMIN COSTS||1,800,000||4,320,000|
|NET OPERATING INCOME||2,140,000|
*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:
Sales manager $ 100,000
Travel and Entertainment 400,000
Compute Pittman’s break-even point in sales dollars for next year assuming:
ALL CALCULATIONS, INCLUDING ANY FINANCIAL STATEMENTS, IN THE WRITTEN PORTION OF YOUR PROJECT MUST BE DONE ON A SPREADSHEET!!
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