Accounting 212 - CVP Project Data – Pittman Company

  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:

   *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:

a.    that the agents commission rate remains unchanged at 15%

b.    that the agents commission rate is increased to 20%

c.    that the company employs its own sales force

ALL CALCULATIONS, INCLUDING ANY FINANCIAL STATEMENTS, IN THE WRITTEN PORTION OF YOUR PROJECT MUST BE DONE ON A SPREADSHEET!!