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:

PITTMAN COMPANY | BUDGETED INCOME STATEMENT | FOR THE YEAR ENDED DECEMBER 31, 2013 | | | | SALES | | $16,000,000 | MANUFACTURING COSTS: | | | VARIABLE | $7,200,000 | | FIXED | ------------------------------------------------- 2,340,000 | ------------------------------------------------- 9,540,000 | GROSS MARGIN | | 6,460,000 | SELLING & ADMIN COSTS: | | | COMMISSION TO AGENTS | 2,400,000 | | FIXED MARKETING COSTS | 120,000* | | FIXED ADMIN COSTS | -------------------------------------------------
1,800,000 | ------------------------------------------------- 4,320,000 | NET OPERATING INCOME | | 2,140,000 | | | | *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