Question

In: Accounting

Carbex, Inc., produces cutlery sets out of high-quality wood and steel. The company makes a Standard...

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?

Solutions

Expert Solution

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.

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