Summary of Case 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 item sold. The company’s budgeted income statement for next year follows:
Budgeted Income Statement
For the Year Ended December 31 Sales | | $16000000 | Manufacturing Costs: | | | Variable | $7200000 | | Fixed Overhead | 2340000 | 9540000 | Gross Margin | | 6460000 | Selling and Administrative Costs: | | | Commissions to agents | 2400000 | | Fixed …show more content…
Determine the volume of sales at which net income would be equal regardless of whether Pittman Company sells through agents ( 20% commissions ) or employs its own sales force.
Sales Volume at RM 16,000,800 ( 20% commission ) would generated RM 2,140,000 income, so if the Company use their own Sales Force the volume of sales to generate same net operating income is :
RM 2,140,000 = ( Sales – 7,200,000 ) – RM 6,585,000*
Sales Volume = RM 8,725,000 + RM 7,200,000
= RM 15,925,000
*Fixed Cost = RM 120,000 + RM 1,725,000 + RM 2,340,000 + RM 2,400,000
:: Sales volume to generate RM 2,140,000 net operating income if the company sells through 20% commission plan is RM 16,000,800 while for own sales force is RM 15,925,000.
4. | Agents’ Commission Rate | Agents’ Commission Rate | Employs its | | 15% | 20% | own sales force | Sales | | 16,000,000 | | 16,000,000 | | 16,000,000 | Manufacturing Costs: | | | | | | | Variables | 7,200,000 | | 7,200,000 | | 7,200,000 | | Fixed overhead | 2,340,000 | 9,540,000 | 2,340,000 | 9,540,000 | 2,340,000 | 9,540,000 | | | | | | | | Gross Margin | | 6,460,000 | | 6,460,000 | | 6,460,000 | Selling and Administrative costs: | | | | | | | Commissions to agents | 2,400,000 | | 3,200,000 | | 2,400,000 | | Fixed