COST AND MANAGERIAL

ACCOUNTING
MADIHA SHAKIL 4423
FARHEEN KARIM ALI 4104
KHADDAM AHMED 4075
ADEEBA HUSSAM 3926
HASSAN RAHIM 3932
 CASE 6-32 COST STRUCTURE;
BREAKEVEN; TARGET PROFITS
INTRODUCTION
 Pittman company
Budgeted 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 6,460,000
Selling 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 2,140,000
Less fixed interest cost 540,000
Income before income taxes 1,600,000
Less income taxes (30%) 480,000
Net 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 expenses
Manufacturing..................................................................................................................7,200,000
Commissions (15%)......................................................................................................2,400,000
Total variable expenses......................................................................................... 9,600,000 @ 60%
Contribution margin…………..................................................................................6,400,000 @40%
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……………………………………………………………...1,600,000
Less income taxes (30%)...............................................................................................480,000
Net income …..................................................................................................1,120,000
Restructuring Data Into Contribution Format For
The 3 Alternatives

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