Question

Carbex, Inc., produces cutlery sets out of high-quality wood and steel. The company makes a Standard set and a Deluxe set and sells them to retail department stores throughout the country. The Standard set sells for $92, and the Deluxe set sells for $107. The variable expenses associated with each set are given below.

	Standard		Deluxe
Variable production costs	$	31.00	$	46.00
Sales commissions (31% of sales price)	$	28.52	$	33.17

The company’s fixed expenses each month are:

Advertising	$	121,000
Depreciation	$	26,500
Administrative	$	71,000

Mary Parsons, the financial vice president, watches sales commissions carefully and has noted that they have risen steadily over the last year. For this reason, she was shocked to find that even though sales have increased, profits for the current month—May—are down substantially from April. Sales, in sets, for the last two months are given below:

	Standard	Deluxe	Total
April	5,600	3,600	9,200
May	2,600	6,600	9,200

Required:

1-a. Prepare contribution format income statements for April.

1-b. Prepare contribution format income statements for May.

3-a. Compute the break-even point in dollar sales for April.

3-b. Would the break-even point in May be higher or lower than the break-even point in April?

Carbex, Inc. Income Statement For May Standard Deluxe Total Amount % Amount % Amount % Salesselected answer correct $239,200selected answer correct not attempted % $706,200selected answer correct not attempted % $945,400selected answer correct 100selected answer correct % Variable expenses: not attempted not attempted not attempted %not attempted not attempted not attempted %not attempted not attempted not attempted % not attempted not attempted not attempted %not attempted not attempted not attempted %not attempted not attempted not attempted % Sales commissionselected answer correct not attempted not attempted %not attempted not attempted not attempted %not attempted not attempted not attempted % not attempted not attempted not attempted %not attempted not attempted not attempted %not attempted not attempted not attempted % Total variable expenses 0 0.0 % 0 0.0 % 0 0.0 % Contribution marginselected answer correct $239,200 0.0 % $706,200 0.0 % $945,400 100.0 % Fixed expenses: Administrativeselected answer correct not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted Advertisingselected answer correct not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted Depreciationselected answer correct not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted Total fixed expenses 0 Net operating incomeselected answer correct $945,400

• Req 1A

Answer 1

Required 1A :
Carbex , Inc.
Income Statements for April
	Standard			Deluxe			Total
	Amount	%		Amount	%		Amount	%
Sales	$515,200 {5600*$92}	100%    {515,200/515,200}	%	$385,200 {3,600*$107}	100% {385,200/385,200}	%	$ 900,400	100% {900,400/900,400}	%
Variable Expenses :							.
Production	$173,600 {5600*$31}	33.7%   {173,600/515,200}	%	$165,600 {3,600*$46}	43.0% {165,600/385,200}	%	$ 339,200	37.7% {339,200/900,400}	%
Sales Commission	$159,712 {5600*$28.52}	31.0%   {159,712/515,200}	%	$119,412 {3,600*$33.17}	31.0% {119,412/385,200}	%	$ 279,124	31.0% {279,124/900,400}	%
Total Variable Expenses	($ 333,312)	(64.7%) {333,312/515,200}	%	($ 285,012 )	(74.0%) {285,012/385,200}	%	($ 618,324)	(68.7%) {900,400/900,400}	%
Contribution Margin	$ 181,888 {515,200-333,312}	35.3 %   {100% -64.7%}		$ 100,188 {$385,200-285,012}	26%   {100% -74 %}		$ 282,076	31.3%       {100% - 68.7%}
Fixed Expenses :
Advertising							$ 121,000
Depreciation							$ 26,500
Administrative							$ 71,000
Total Fixed Expenses							($ 218,500)
Net Operating Income							$63,576 {282,076-218,500}

Required 1b :
Carbex , Inc.
Income Statements for May
	Standard			Deluxe			Total
	Amount	%		Amount	%		Amount	%
Sales	$239,200 {2600*$92}	100%    {239,200/239,200}	%	$706,200 {6,600*$107}	100% {706,200/706,200}	%	$ 945,400	100% {945,400/945,400}	%
Variable Expenses :							.
Production	$80,600 {2600*$31}	33.7%    {80,600/239,200}	%	$303,600 {6,600*$46}	43.0% {303,600/706,200}	%	$ 384,200	40.6% {384,200/945,400}	%
Sales Commission	$74,152 {2600*$28.52}	31.0%   {74,152/239,200}	%	$218,922 {6,600*$33.17}	31.0% {218,922/706,200}	%	$ 293,074	31.0% {293,074/945,400}	%
Total Variable Expenses	($ 154,752)	(64.7%) {333,312/239,200}	%	($ 522,522)	(74.0%) {522,522/706,200}	%	($ 677,274)	(71.6%) {677,274/945,400}	%
Contribution Margin	$ 84,448 {239,200 -154,752}	35.3 %   {100% -64.7%}		$ 183,678 {706,200-522,522}	26%   {100% -74 %}		$ 268,126	28.4%       {100% - 71.6%}
Fixed Expenses :
Advertising							$ 121,000
Depreciation							$ 26,500
Administrative							$ 71,000
Total Fixed Expenses							($ 218,500)
Net Operating Income							$49,626 {268,126-218,500}

Required 3 A :

Break even point in dollar Sales For April= $ 698,083

Explanation :

Contribution Margin ratio = Total Contribution margin / Total sales

Contribution Margin ratio = $ 282,076 / $ 900,400

Contribution Margin ratio = 31.3 % (Rounded to 1 Decimal )

Break even point in dollar Sales = Total Fixed expense / Contribution Margin ratio

Break even point in dollar Sales = $ 218,500 / 31.3%

Break even point in dollar Sales = $ 698,083 (Rounded)

Required 3 B :

Higher

Break even point in May ($769,366 ) be Higher than the Break even point In April ($698,083)

To Calculate the Break even point in dollar sales for May:

Contribution Margin ratio = Total Contribution margin / Total sales

Contribution Margin ratio = $ 268,126 / $ 945,400

Contribution Margin ratio = 28.4% (Rounded to 1 decimal)

Break even point in dollar Sales = Total Fixed expense / Contribution Margin ratio

Break even point in dollar Sales = $ 218,500 / 28.4%

Break even point in dollar Sales = $ 769,366 (Rounded)

So, Break even point in dollar Sales For May = $ 769,366

Break even point in dollar Sales For April = $ 698,083 (See Required 3 B)

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