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 $60, and the Deluxe set sells for $75. The variable expenses associated with each set are given below. Standard Deluxe Variable production costs $ 15.00 $ 30.00 Sales commissions (15% of sales price) $ 9.00 $ 11.25 The company’s fixed expenses each month are: Advertising $ 105,000 Depreciation $ 21,700 Administrative $ 63,000 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 4,000 2,000 6,000 May 1,000 5,000 6,000 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?

Answer 1

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Carbex
Workings for Answer 1 a	Standard	Deluxe
Units sold	4,000.00	2,000.00
Selling price per unit	60.00	75.00
Sales Revenue	240,000.00	150,000.00
Variable production costs per unit	15.00	30.00
Variable costs	60,000.00	60,000.00
Sales commission per unit	9.00	11.25
Sales commission	36,000.00	22,500.00

Fixed costs	Amount $
Advertising	105,000.00
Depreciation	21,700.00
Administrative	63,000.00
Total Fixed costs	189,700.00

Answer 1 a
Income Statement	Standard	Deluxe	Total
Sales Revenue	240,000.00	150,000.00	390,000.00
Less: Variable costs	60,000.00	60,000.00	120,000.00
Contribution margin	180,000.00	90,000.00	270,000.00
Less: Fixed costs			189,700.00
Net Profit			80,300.00

Workings for Answer 1 b	Standard	Deluxe
Units sold	1,000.00	5,000.00
Selling price per unit	60.00	75.00
Sales Revenue	60,000.00	375,000.00
Variable production costs per unit	15.00	30.00
Variable costs	15,000.00	150,000.00
Sales commission per unit	9.00	11.25
Sales commission	9,000.00	56,250.00

Answer 1 b
Income Statement	Standard	Deluxe	Total
Sales Revenue	60,000.00	375,000.00	435,000.00
Less: Variable costs	15,000.00	150,000.00	165,000.00
Contribution margin	45,000.00	225,000.00	270,000.00
Less: Fixed costs			189,700.00
Net Profit			80,300.00

Answer 3 a and 3 b	April	May
Sales Revenue	390,000.00	435,000.00
Contribution margin	270,000.00	270,000.00
Contribution margin %	69.23%	62.07%
Fixed costs	189,700.00	189,700.00
Breakeven sales $	274,011.11	305,627.78

Answer 3 b

So the break-even point in May is higher than the break-even point in April.