Pittman Company

Contribution Margin Income Statement

Commission at Commission at Own Sales Force
  15% 20% (7.5%)
Sales $ 16.000.000,00 $ 16.000.000,00 $ 16.000.000,00
Less: Variable expenses      
Manufacturing costs $ 7.200.000,00 $ 7.200.000,00 $ 7.200.000,00
Commission $ 2.400.000,00 $ 3.200.000,00 $ 1.200.000,00
Total variable expenses $ 9.600.000,00 $ 10.400.000,00 $ 8.400.000,00
Contribution Margin $ 6.400.000,00 $ 5.600.000,00 $ 7.600.000,00
Less: Fixed expenses      
Manufacturing overhead $ 2.340.000,00 $ 2.340.000,00 $ 2.340.000,00
Marketing costs $ 120.000,00 $ 120.000,00 $ 2.520.000,00
Administrative costs $ 1.800.000,00 $ 1.800.000,00 $ 1.725.000,00
Interest $ 540.000,00 $ 540.000,00 $ 540.000,00
Total fixed expenses $ 4.800.000,00 $ 4.800.000,00 $ 7.125.000,00
Income before income taxes $ 1.600.000,00 $ 800.000,00 $ 475.000,00
Income taxes (30%) $ 480.000,00 $ 240.000,00 $ 142.500,00
Net Income $ 1.120.000,00 $ 560.000,00 $ 332.500,00

Total Marketing Costs = Marketing costs + Amount paid as commission

= $120.000 + $2.400.000
= $2.520.000

Total Administrative Costs = Administrative costs – Amount of savings

= $1.800.000 - $75.000
= $1.725.000

1. a. Dollar break-even point = Fixed costs/Conrtiburion margin ratio

= $4.800.000/40%
= $12.000.000

Contribution margin ratio = Contribution margin/Sales revenue

= $6.400.000/$16.000.000
= 40%
 The break-even point in sales dollar is $12.000.000

b. Dollar break-even point = Fixed costs/Contribution margin ratio

= $4.800.000/35%
= $13.714.285

Contribution margin ratio = Contribution margin/Sales revenue

= $5.600.000/$16.000.000
= 35%
The break-even point in sales dollar is $13.714.825
c. Dollar break-even point = Fixed costs/Contribution margin ratio
= $7.125.000/47,5%
= $15.000.000

Contribution margin ratio = Contribution margin/Sales revenue

= $7.600.000/$16.000.000
= 47,5%

2. Dollar sales = Fixed costs + Disred profit / Contribution margin ratio

= $4.800.000 + $1.600.000 / 35%
= $18.285.714

3. Variable Cost Ratio (commission rate 20%) = Total Variable Costs / Sales revenue
= $10.400.000 / $16.000.000
= 65%

Variable Cost Ratio (own sales force) = Total Variable Costs / Sales revenue
= $8.400.000 / $16.000.000
= 52,5%

Total costs when is commission is 20% = Total costs for own sales force
0,65X + $4.800.000 = 0,525X + $7.125.000
0,65X - 0,525X = $7.125.000 - $4.800.000
0,125X = $2.325.000
 X = $18.600.000

4. a. Degree of Operating leverage (15%) = Contribution margin / Income before taxes

= $6.400.000 / $1.600.000
= 4,00

b. Degree of Operating leverage (20%) = $5.600.000 / $800.000

= 7,00

c. Degree of Operating leverage (own sales force) = $7.600.000 / $475.000

= 16,00

5. The net income, break-even point, degree of operating leverage should be considered
to determine whether own sales force should be employed by the company or use of
sales agent when commission is paid at the rate of 20% is beneficial for the company.
The net income when commission rate is 20% is $560.000 and when own sales force
is employed is $332.500. The dollar break-even sales when the commission rate is
20% is $13.714.285 and when own sales force is employed are $15.000.000. The
degree of operating leverage when commission rate is 20% is 7,00 and when own
sales force is employed is 16,00. The company should continue to use sales agent
at a commission rate 20%.