Pittman Company is a small but growing manufacturer oftelecommunications equipment. The company has no sales force of itsown; rather, it relies completely on independent sales agents tomarket its products. These agents are paid a sales commission of15% for all items sold. Barbara Cheney, Pittman’s controller, hasjust prepared the company’s budgeted income statement for next yearas follows: Pittman Company Budgeted Income Statement For the YearEnded December 31 Sales $ 25,000,000 Manufacturing expenses:Variable $ 11,250,000 Fixed overhead 3,500,000 14,750,000 Grossmargin 10,250,000 Selling and administrative expenses: Commissionsto agents 3,750,000 Fixed marketing expenses 175,000 * Fixedadministrative expenses 2,160,000 6,085,000 Net operating income4,165,000 Fixed interest expenses 875,000 Income before incometaxes 3,290,000 Income taxes (30%) 987,000 Net income $ 2,303,000*Primarily depreciation on storage facilities. As Barbara handedthe statement to Karl Vecci, Pittman’s president, she commented, “Iwent ahead and used the agents’ 15% commission rate in completingthese statements, but we’ve just learned that they refuse to handleour products next year unless we increase the commission rate to20%.” “That’s the last straw,” Karl replied angrily. “Those agentshave been demanding more and more, and this time they’ve gone toofar. How can they possibly defend a 20% commission rate?” “Theyclaim that after paying for advertising, travel, and the othercosts of promotion, there’s nothing left over for profit,” repliedBarbara. “I say it’s just plain robbery,” retorted Karl. “And Ialso say it’s time we dumped those guys and got our own salesforce. Can you get your people to work up some cost figures for usto look at?” “We’ve already worked them up,” said Barbara. “Severalcompanies we know about pay a 7.5% commission to their ownsalespeople, along with a small salary. Of course, we would have tohandle all promotion costs, too. We figure our fixed expenses wouldincrease by $3,750,000 per year, but that would be more than offsetby the $5,000,000 (20% × $25,000,000) that we would avoid onagents’ commissions.” The breakdown of the $3,750,000 cost follows:Salaries: Sales manager $ 156,250 Salespersons 937,500 Travel andentertainment 625,000 Advertising 2,031,250 Total $ 3,750,000“Super,” replied Karl. “And I noticed that the $3,750,000 equalswhat we’re paying the agents under the old 15% commission rate.”“It’s even better than that,” explained Barbara. “We can actuallysave $115,000 a year because that’s what we’re paying our auditorsto check out the agents’ reports. So our overall administrativeexpenses would be less.” “Pull all of these numbers together andwe’ll show them to the executive committee tomorrow,” said Karl.“With the approval of the committee, we can move on the matterimmediately.” Required: 1. Compute Pittman Company’s break-evenpoint in dollar sales for next year assuming: a. The agents’commission rate remains unchanged at 15%. b. The agents’ commissionrate is increased to 20%. c. The company employs its own salesforce. 2. Assume that Pittman Company decides to continue sellingthrough agents and pays the 20% commission rate. Determine thedollar sales that would be required to generate the same net incomeas contained in the budgeted income statement for next year. 3.Determine the dollar sales at which net income would be equalregardless of whether Pittman Company sells through agents (at a20% commission rate) or employs its own sales force. 4. Compute thedegree of operating leverage that the company would expect to haveat the end of next year assuming: a. The agents’ commission rateremains unchanged at 15%. b. The agents’ commission rate isincreased to 20%. c. The company employs its own sales force. Useincome before income taxes in your operating leverage computation.Determine the dollar sales at which net income would be equalregardless of whether Pittman Company sells through agents (at a20% commission rate) or employs its own sales force. (Do not roundintermediate calculations.)