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As Barbara handed the statement to Karl Vocal. Pittman's president. she commented. "I won't ahead and used the agents' 15% commission rate in completing these statements, but we've Just leaked that they refuse to handle our product next year unloose we increase the commission rate to 20%." That s the last straw, " Kart 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 8.4% 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 expenses would increase by $2, 805,000 per year, but that would be more than offset by the $3, 740.000 (20% x $18.700,000) that we would avoid on agents' commissions. The breakdown of the $2.805.000 cost follows "Super' replied Karl. -And l noticed that the $2.805,000 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 $120,000 a year because that's what wo 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 will show Thom to the executive committee tomorrow." said Karl. "With the approval of the committee, we can move on the matter immediately. Determine the volume of sales at which net income would be equal regardless of whether Pittman Company sells through agents (at a 20% commission rate) or employs its own sales force. (Enter your answer in whole dollars and not in thousands. Round CM ratio to 3 decimal places.) Compute the degree of operating leverage that the company would expect to have on December 31 at the end of next year assuming: The agents' commission rata remains unchanged at 15% (Round you answer to 2 decimal places.) The agents' commission rate Is Increased to 20%. (Round youth answer to 2 decimal places.) The company employs Its own sales forces. (Round your answer to 2 decimal places.)

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