Question

Carbex, Inc., produces cutlery sets out of high-quality wood and steel. The company makes a standard cutlery set and a deluxe set and sells them to retail department stores throughout the country. The standard set sells for $82, and the deluxe set sells for $97. The variable expenses associated with each set are given below.

	Standard		Deluxe
Production costs	$	26.00	$	41.00
Sales commissions (26% of sales price)	$	21.32	$	25.22

The company’s fixed expenses each month are:

Advertising	$	116,000
Depreciation	$	25,000
Administrative	$	68,500

Salespersons are paid on a commission basis to encourage them to be aggressive in their sales efforts. 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	5,100	3,100	8,200
May	2,100	6,100	8,200

Required:
1-a.	Prepare contribution format income statements for April. Round "Total percent" answers to 1 decimal place (i.e .1234 should be entered as 12.3).

       

1-b.	Prepare contribution format income statements for May. Round "Total percent" answers to 1 decimal place (i.e .1234 should be entered as 12.3).

       

3-a.	Compute the break-even point in dollar sales for April. (Round intermediate percentage calculations to 1 decimal place.)

        

3-b.	Whether the break-even point would be higher or lower with May's sales mix than with April’s sales mix.
	Higher Lower

Answer 1

1 a) contribution formate income statement : for April

Particulars	standard ($)		delux($)		total ($)
Sales	418200	100%	300700	100%	718900	100%
(-) variable cost :
i) production cost	(132600)	31.7%	(127100)	42.3%	(259700)	36.1%
Gross contribution margin	285600	68.3%	173600	57.7%	459200	63.9%
ii) sales commission	(108732)	26%	(78182)	26%	(186914)	26%
Contribution margin	176868	42.3%	95418	31.7%	272286	37.9%
(-) fixed cost :
i) adverstise					(116000)
ii) depreciation					(25000)
iii) administrative					(68500)
Net income					62786

1 b) contribution formate income statement : for may

Particulars	standard ($)		delux ($)		total($)
Sales	172200	100%	591700	100%	763900	100%
(-) variable cost
i) production cost	(54600)	31.7%	(250100)	42.3%	(304700)	39.9%
Gross margin	117600	68.3%	341600	57.7%	459200	60.1%
ii) sales commission	(44772)	26%	(153842)	26%	(198614)	26%
Contribution margin	72828	42.3%	187758	31.7%	260586	34.1%
(-) fixed cost
i) advertising					(116000)
ii) depreciation					(25000)
iii) administrative					(68500)
Net income					51086

3 a) break even point sales (in $) for April =total fixed cost / combined margin ratio. =($116000+$25000+$68500)/0.379=$552770.4

3 b) break even point sales ( in $) for may = ($116000+$25000+$68500)/0.341=$614369.5 .

So may's break even point sales is higher than April's. ($614369.5>$552770.4)