Pittman Company
Sales
Variable Expenses:
Manufacturing
Selling commissions
Total Variable expenses
(a)
As Budgeted
Absorb 20% Commission
(b)
Own Sales Force
$
16,000,000
7,200,000
2,400,000
9,600,000
6,400,000
Contribution Margin
Fixed expenses:
Manufacturing overhead
2,340,000
Marketing
120,000
Administrative
1,800,000
Interest
540,000
Total Fixed expenses
4,800,000
Net Operating Income
$
1,600,000
1 Recalculate the Income Statements above for the two options: (a) Agree to 20% commission rate -or- (b) Hire own sales force.
2 Which option (a or b) gives the company the best Contribution Margin ratio? (show your work)
3 If the company switches to employing their own sales force, will they be moving to a more fixed cost or variable cost structure?
4 Show how your answer to #3 has impacted the company's breakeven point?
5 Under what economic circumstances would your answer to #3 be advantageous?
6 Assume the company decides to continue selling through agents and pays the 20% commission rate.
Determine the dollar sales that would be required to generate the same net income as was originally budgeted.
