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 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

1a) Income statement for April under Contribution format:
	Standard	Deluxe	Amount $
Sales	88	103	825400
Less: Variable costs	54.52	73.87	545566
Contribution	33.48	29.13	279834
Less: Fixed costs			214900
NOI			64934
1b) Income statement for May under Contribution format:
	Standard	Deluxe	Amount $
Sales	88	103	870400
Less: Variable costs	54.52	73.87	603616
Contribution	33.48	29.13	266784
Less: Fixed costs			214900
NOI			51884
3a)
	Standard	Deluxe
Contri	33.48	29.13
sales	475200	350200
sales ratio	0.58	0.42
Proportional contribution	33.48*0.58=19.42	29.13*0.42=12.23
Total proportional contribution= $31.65
Fixed cost = 214900
Break Even Point (units)= Fc / contri = 214900/31.65= 6791
Standard units at BEP = 6791*0.58=3939
Deluxe units at BEP = 6791 * 0.42 = 2852
Break Even Point (dollars)= 3939*88+2852*103= 640388
3b) As the sales in may of standard, with high contribution, is low, so BEP would be higher to that of April.