Accounting CVP project
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acct_212_cvp_project.docx2
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:
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PITTMAN COMPANY |
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BUDGETED INCOME STATEMENT |
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FOR THE YEAR ENDED DECEMBER 31, 2017 |
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SALES |
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$16,000,000 |
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MANUFACTURING COSTS: |
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VARIABLE |
$7,200,000 |
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FIXED |
2,340,000 |
9,540,000 |
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GROSS MARGIN |
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6,460,000 |
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SELLING & ADMIN COSTS: |
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COMMISSION TO AGENTS |
2,400,000 |
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FIXED MARKETING COSTS |
120,000* |
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FIXED ADMIN COSTS |
1,800,000 |
4,320,000 |
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NET OPERATING INCOME |
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2,140,000 |
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*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
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