# 2 Accounting 212 CVP Project Data Pittman Company is a small but

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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

COMMISSION TO AGENTS

2,400,000

FIXED MARKETING COSTS

120,000*

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

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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