Accounting CVP project
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:
| PITTMAN COMPANY | ||
| BUDGETED INCOME STATEMENT | ||
| FOR THE YEAR ENDED DECEMBER 31, 2017 | ||
| SALES | $16,000,000 | |
| MANUFACTURING COSTS: | ||
| VARIABLE | $7,200,000 | |
| FIXED | 2,340,000 | 9,540,000 |
| GROSS MARGIN | 6,460,000 | |
| 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:
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:
that the agents commission rate remains unchanged at 15%
that the agents commission rate is increased to 20%
that the company employs its own sales force
ALL CALCULATIONS, INCLUDING ANY FINANCIAL STATEMENTS, IN THE WRITTEN PORTI Cost ON OF YOUR PROJECT MUST BE DONE ON A SPREADSHEET!!
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