Pittman Company is a small bur growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent salesagents to market its products. These agents are paid a commission of 15% of the sellingprice of all items sold. Barbara Cheney, Pittman's controller, has just prepared the company's budgeted incomestatement for next year. The statement follows: Pittman Company Budgeted Income Statement For the Year Ended December 31
Sales $24,000,000
Manufacturing expenses:
Variable $10,800,000
Fixed overhead 3,360,000
14,160,000
Gross margin 9,840,000
Selling and administrative expenses:
Commissions to agents 3,600,000
Fixed marketing expenses 168,000
Fixed administrative expenses 2,120,000
Net operating income 3,952,000
Fixed interest expenses 840,000
Income before income taxes 3,112,000
Income taxes (30%) 933,600
Net income $2,178,400

As Barbara handed the statement to Karl Vecci, Pittman's president, she commented, "I wentahead and used the agents' 15% commission rate in completing these statements, but we'vejust learned that they refuse to handle our products next year unless we increase the commissionrate to 20%.""That's the last straw," Karl 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?"