1) Compute Pittman Company’s break-even point in dollar sales for next year assuming:

a. The agents’ commission rate remains unchanged at 15%.

b. The agents’ commission rate is increased to 20%.
c. The company employs its own sales force.

a)
Agent’s commission rate remains unchanged at 15%:

𝐹𝑖𝑥𝑒𝑑 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
The dollar sales to breakeven is $12,000,000. Breakeven =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑅𝑎𝑡𝑖𝑜
4,800,000
= $12,000,000
.40

4,800,000
When the agent’s commission rate is increased to 20% Breakeven = $13,714,286
.35

The dollar sales to breakeven is $13,714,286.

c)
7,125,000
When using the companies own sales force: Breakeven = = $15,000,000
.475
The dollar sales to breakeven is 15,000,000
2. 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.

In order to get $1,120,000 net income a company might generate $1,600,000 income before
taxes.
𝑇𝑎𝑟𝑔𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥+𝐹𝑖𝑥𝑒𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
Dollar sales to attain target =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑅𝑎𝑡𝑖𝑜
1,600,000+4,800,000
The dollar sales to attain target is . = $18,285,714
.35
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%:
𝐶𝑀
degree of operating leverage =
𝐼𝑛𝑐𝑜𝑚𝑒 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥𝑒𝑠

6,400,000
degree of operating leverage = =4
1,600,000

The degree of operating leverage is 4.

b)
The agent commission rate is increased to 20%:
5,600,000
degree of operating leverage = =8
800,000
The degree of operating leverage is 8.
c)
The company employ own sales force:
7,600,000
degree of operating leverage = = 16
475,000
The degree of operating leverage is 16.
5.
Based on the data in (1) through (4) above, make a recommendation as to whether the company should
continue to use sales agents (at a 20% commission rate) or employ its own sales force. Give reasons for
your answer.

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%.