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a)
Agents commission rate remains unchanged at 15%:
4,800,000
.40
expenses
Contribution Margin Ratio
= $12,000,000
4,800,000
.35
$13,714,286
The dollar sales to breakeven is $13,714,286.
c)
When using the companies own sales force: Breakeven =
7,125 , 000
.475
= $15,000,000
In order to get $1,120,000 net income a company might generate $1,600,000 income before
taxes.
1,600,000+ 4,800,000
.35
= $18,285,714
3.
Assume that Pittman Company decides to continue selling through agents and pays the 20% commission
rate. Determine the volume of sales that would be required to generate the same net income as contained
in the budgeted income statement for next year.
We are trying to find that volume of sales and costs before income tax under two plans are
equal. Let X = total sales revenue.
(20%).65x+$4,800,000 = 0.525x+ 7,125,000 (Next Year income)
x = 18,600,000
Thus at sales level of either plans would yield income before tax and net income. The
commission plans sales level would yield largest net income
4.
a) DOL affects net income.
The agent commission rate remained unchanged at 15%:
degree of operating leverage =
CM
Income before taxes
6,400,000
1,600,000
=4
5,600,000
800,000
=8
7,600,000
475,000
= 16
1.Sales agents will be used at the 20% commission rate because the sale agents will have less
effect on the net income.
2.Keeping them for at least one more year that gives company extra time to hire capable people
that gets organization of sales group.
3.The sales force is not desirable than using sales agents till company reach $18,600,000 sales
per year.
4. The sales force plan has high leverage. Which means there will be an increase in fixed costs
and a decrease in variable.The profits are expected to be greater at less risk than staying with
agents at commission rate of 20%.