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Molodets [167]
1 year ago
12

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.
Barbara Cheney, Pittman's controller, has just prepared the company's budgeted income statement for next year. The statement follows:

As Barbara handed the statement to Karl Vecci, Pittman's president, she commented, "I went ahead and used the agents' 15% commission rate in completing these statements, but we've just learned that they refuse to handle our products next year unless we increase the commission rate to 20%.

"That's the last straw" Karl replied angrily. "Those agents have been demanding more and more, and this time they've gone too far. How can they possibly defend a 20% commission rate?"

"They claim that after paying for advertising, travel, and the other costs of promotion, there's nothing left over for profit," replied Barbara.

"I say it's just plain robbery," retorted Karl. "And I also say it's time we dumped those guys and got our own sales force. Can you get your people to work up some cost figures for us to look at?

"We've already worked them up" said Barbara. "Several companies we know about pay a 7.5% commission to their own salespeople, along with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fixed costs would increase by $2,400,000per year, but that would be more than offset by the $3,200,000(20 % Ã 16,000,000) that we would avoid on agents' commissions."
The breakdown of the $2,400,000 cost follows:

"Super," replied Karl. "And I noticed that the $2,400,000 is just what we're paying the agents under the old 15% commission rate."

"It's even better than that," explained Barbara. "We can actually save $75,000 a year because that's what we're having to pay the auditing firm now to check out the agents' reports. So our overall administrative costs would be less."

"Pull all of these numbers together and we'll show them to the executive committee tomorrow," said Karl. "With the approval of the committee, we can move on the matter immediately."

Compute the degree of operating leverage that the company would expect to have on December 31 at the end of 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.
Use income before income taxes in your operating leverage computation.
Business
1 answer:
valentinak56 [21]1 year ago
4 0

A)Degree of operating leverage=Contribution/EBIT

=6400,000/2140000=2.99.

B) Degree of operating leverage=Contribution/EBIT

=5600,000/1340000=4.18

C) Degree of operating leverage=Contribution/EBIT

=7600,000/1015000=7.49

One conclusion that companies can draw from examining operational leverage is that companies that minimize fixed costs can increase profits without changing selling prices, contribution margins, or unit sales.

The Operating Leverage formula is used to calculate a company's break-even point, helping to set a reasonable selling price that covers all costs and produces a profit. This gives you insight into how well your company is using fixed-cost items such as inventory and machinery to make a profit. The more profit a company can extract from the same amount of fixed assets, the higher its operational leverage.

Learn more about operating leverage at

brainly.com/question/24278932

#SPJ4

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A reduction in the number of kanbans (given a constant container size) requires: Group of answer choices an increase in lead tim
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Suppose that the European Union is now experiencing a recession. Its actual real GDP is €200 billion, and the estimate of its po
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As per the data given in the question,

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3 years ago
Victory Corporation sold 400 shares of treasury stock for $45 per share. The cost for the shares was $35. The entry to record th
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Answer:The entry to record the sale will include a Credit toPaid in Capital from  treasury stock at $4,000.

Explanation:

Journal entry to record sale of shares

Accounts and explanation          Debit                  Credit

Cash                                        $18,000

Treasury stock                                                      $14,000      

Paid in Capital from Treasury STOCK                  $4,000

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3 years ago
Under which conditions is price elasticity of supply relatively elastic or relatively inelastic?
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Answer:

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Explanation:

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3 years ago
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