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Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather it relies completely independent sales agents to market its products. These agents are paid a commission of 15% of the selling price for all items sold. The company's budgeted income statement (in RM) is as follows: Pittman Company Budgeted Income Statement for the Year Ending December 31 16,000,000 Sales (15,100 units) Manufacturing costs: Variable Fixed overhead 7,200,000 2,340,000 9,540,000 6,460,000 Gross margin Selling and administrative costs: Commission to agents Fixed marketing costs Fixed administrative costs 2,400,000 120,000 1,800,000 Net operating income Fixed interest cost Income before income taxes Income taxes (30%) Net income Figure 1: Budgeted Income Statement 4,320,000 2,140,000 540,000 1,600,000 480,000 1,120,000 The independent sales agents are requesting that the 15% commission rate be increased to 20%. Instead of increasing the commission to 20%, Pittman company is considering setting up its own sales force. Setting up the sales force will incur additional fixed costs of RM 2,400,000 per year but would more than offset the RM 3,200,000 (20% x RM 16,000,000) that the company would avoid on the independent sales agents' commissions. The breakdown of the additional fixed costs are as follows: Salaries: Sales manager Salespersons Travel and entertainment Advertising Total Figure 2: Breakdown of Additional Costs 100,000 600,000 400,000 1,300,000 RM 2,400,000 iv. Compute the degree of operating leverage (ratio of operating income over sales) 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%; and C. The company employs its own sales force. Use the income before income taxes in your operating leverage computation

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