MADIHA SHAKIL 4423FARHEEN KARIM ALI 4104KHADDAM AHMED 4075ADEEBA HUSSAM 3926

HASSAN RAHIM 3932

COST AND MANAGERIAL ACCOUNTING

CASE 6-32 COST STRUCTURE; BREAKEVEN; TARGET PROFITS

INTRODUCTION

Pittman companyBudgeted income statement

For the year ended December 31

Sales $16,000,000

Manufacturing costs Variable Costs 7,200,000 Fixed overhead 2,340,000 9,540,000

Gross margin 6,460,000Selling and administrative costs:

Commissions to agents 2,400,000 Fixed marketing costs 120,000* Fixed administrative costs 1,800,000 4,320,000

Net operating income 2,140,000Less fixed interest cost 540,000Income before income taxes 1,600,000Less income taxes (30%) 480,000Net income $1,120,000

THE BREAKDOWN OF THE COMMISSIONS TO AGENTS ($2,400,000)

Restructuring Data Into Contribution Format For The 3 Alternatives

15% Commission

Sales ................................................................................................................................$16,000,000 @100% Less variable expensesManufacturing..................................................................................................................7,200,000 Commissions (15%)......................................................................................................2,400,000 Total variable expenses......................................................................................... 9,600,000 @ 60%Contribution margin…………..................................................................................6,400,000 @40% Less fixed expensesManufacturing overhead.............................................................................................2,340,000 Marketing..............................................................................................................................120,000 Administrative.................................................................................................................1,800,000 Interest…................................................................................................................................540,000 Total fixed expenses.....................................................................................4,800,000 Income before income taxes……………………………………………………………...1,600,000 Less income taxes (30%)...............................................................................................480,000 Net income …..................................................................................................1,120,000

20% Commission

Sales .....................................................................................................16,000,000 @ 100% Less variable expenses:Manufacturing......................................................................................................7,200,000 Commissions (20%) ………..............................................................................3,200,000 Total variable expenses............................................................................10,400,000 @ 65% Contribution margin.....................................................................................5,600,000 @ 35% Less fixed expenses:Manufacturing overhead..................................................................................2,340,000 Marketing................................................................................................................120,000 Administrative......................................................................................................1,800,000 Interest......................................................................................................................540,000 Total fixed expenses.......................................................................................4,800,000 Income before income taxes............................................................................ 800,000 Less income taxes (30%)...................................................................................240,000 Net income ............................................................................................................$560,000

Restructuring Data Into Contribution Format For The 3 Alternatives

Own Sales Force

Sales ................................................................................................$16,00,0000 @ 100%Less variable expenses:Manufacturing..................................................................................7,200,000Commissions 7.5% …………..........................................................1,200000Total variable expenses................................................................8,400,000 @ 52.5%Contribution margin......................................................................7,600,000 @ 47.5%Less fixed expenses:Manufacturing overhead..............................................................2,340,000Marketing.............................................................................................2,520,000 Administrative...................................................................................1,725,000 Interest......................................................................................................540,000Total fixed expenses.........................................................................7,125,000Income before income taxes............................................................475,000Less income taxes (30%)..................................................................142.500Net income ............................................................................................ 332.500

Restructuring Data Into Contribution Format For The 3 Alternatives

•Fixed marketing cost increase by 2,400,000 so fixed marketing cost become $120,000 + $2,400,000 = $2,520,000 • Fixed administrative cost decrease by 75,000 so fixes administrative cost become $1,800,000 – $75,000 = $1,725,000

1ST REQUIREMENT

Break-even Point @ 15% commission

1ST REQUIREMENT

Break-even Point @ 20% commission

1ST REQUIREMENT

Own Sales Force

2nd REQUIREMENT

3rd REQUIREMENT

4th REQUIREMENT

4th REQUIREMENT

4th REQUIREMENT

5th REQUIREMENT

Thank you