Question

I am having difficulty with this problem. My break-even point in dollar sales totals appears to be off by several hundred dollars.  

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 14% 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 31Sales  $18,400,000Manufacturing expenses:    Variable$7,600,000  Fixed overhead 2,660,000 10,260,000Gross margin   8,140,000Selling and administrative expenses:    Commissions to agents 2,576,000  Fixed marketing expenses 200,000*  Fixed administrative expenses 2,200,000 4,976,000Net operating income   3,164,000Fixed interest expenses   620,000Income before income taxes   2,544,000Income taxes (20%)   508,800Net income  $2,035,200

*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’ 14% 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 19%.”

“That’s the last straw,” Karl replied angrily. “Those agents have been demanding more and more, and this time they’ve gone too far. How can they possibly defend a 19% commission rate?”

“They claim that after paying for advertising, travel, and the other costs of promotion, there’s 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?”

“We’ve already worked them up,” said Barbara. “Several companies we know about pay a 8.3% commission to their own salespeople, along with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fixed expenses would increase by $2,576,000 per year, but that would be more than offset by the $3,496,000 (19% × $18,400,000) that we would avoid on agents’ commissions.”

The breakdown of the $2,576,000 cost follows:

Salaries:
Sales manager	$	180,000
Salespersons		1,000,000
Travel and entertainment		720,000
Advertising		676,000
Total	$	2,576,000
“Super,” replied Karl. “And I noticed that the $2,576,000 is just what we’re paying the agents under the old 14% commission rate.” “It’s even better than that,” explained Barbara. “We can actually save $115,000 a year because that’s what we’re having to pay the auditing firm now to check out the agents’ reports. So our overall administrative expenses would be less.” “Pull all of these numbers together and we’ll show them to the executive committee tomorrow,” said Karl. “With the approval of the committee, we can move on the matter immediately.” Required: 1. Compute Pittman Company’s break-even point in dollar sales for next year assuming: (Enter your answer in whole dollars and not in thousands. Round CM ratio to 3 decimal places and final answers to the nearest dollar amount.)    a. The agents’ commission rate remains unchanged at 14%. Break-even point in dollar sales

b. The agents’ commission rate is increased to 19%.

	Break-even point in dollar sales

c. The company employs its own sales force.

	Break-even point in dollar sales

Answer 1