Cost Structure;

Target Profit and Break Even Analysis

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

a. The agents’ commission remains unchanged at 15%

$12,000,000 in sales is needed to break even while employing an outside sales force with commissions of 15% of sales.

b. The agents’ commission rate is increased to 20%

$13,714,286 in sales is needed to break even while employing an outside sales force with commissions of 20% of sales.

c. The company employs its own sales force.

$15,000,000 in sales is needed to break even while employing the company's own sales force with commissions of 7.5% of sales.

Before Pittman Company’s break-even point in sales can be determined, we must initially “reformat” the provided Budgeted Income Statement for the Year Ended December 31 (for the next year) to reflect a Contribution Income Statement format. The reason for this application is to separate the Variable and Fixed costs associated in selling telecommunications equipment to derive pertinent data needed to determine break even sales. The restructuring of each Income Statement may be found in Appendix A of this report.

Reformatting the Income Statement allows us to determine first, the Contribution Margin. The Contribution Margin is significant in determining Break-even point whether by the number of units to break even or the number of sales dollars needed to break-even. After determining the Contribution Margin, we are able to divide Sales for the year into that number to yield our Contribution Margin Ratio. Separating the Variable and Fixed Costs in selling telecommunications equipment also will allow us to group all of our fixed costs together, total, and use that number to plug into our BEP$ formula.

Formulas have been outlined below in order for us to properly demonstrate how to