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 $88, and the Deluxe set sells for $103. The variable expenses associated with each set are given below.

	Standard		Deluxe
Variable production costs	$	29.00	$	44.00
Sales commissions (29% of sales price)	$	25.52	$	29.87

The company’s fixed expenses each month are:

Advertising	$	119,000
Depreciation	$	25,900
Administrative	$	70,000

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	5,400	3,400	8,800
May	2,400	6,400	8,800

Required:

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

1-b. Prepare contribution format income statement 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?

Answer 1

1a)

CONTRIBUTION INCOME STATEMENT FOR THE MONTH OF APRIL
	Standard	%	Deluxe	%	Total	%
Sales	$ 475,200.00	100.00%	$ 350,200.00	100%	$ 825,400.00	100.00%
Variable Cost	$ 294,408.00	61.95%	$ 251,158.00	71.72%	$ 545,566.00	66.10%
Contribution Margin	$ 180,792.00	38.05%	$    99,042.00	28.28%	$ 279,834.00	33.90%
Fixed Cost					$ 214,900.00
Operating Income					$    64,934.00

1b)

CONTRIBUTION INCOME STATEMENT FOR THE MONTH OF MAY
	Standard	%	Deluxe	%	Total	%
Sales	$ 211,200.00	100.00%	$ 659,200.00	100%	$ 870,400.00	100.00%
Variable Cost	$ 130,848.00	61.95%	$ 472,768.00	71.72%	$ 603,616.00	69.35%
Contribution Margin	$    80,352.00	38.05%	$ 186,432.00	28.28%	$ 266,784.00	30.65%
Fixed Cost					$ 214,900.00
Operating Income					$    51,884.00

3a) Break even sales in dollars= Fixed cost/Contribution Margin ratio

=214,900/33.90%

=633,870.29

3b)Break even point for the month of may will be higher than the April as contribution margin in may is lower than the April