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 $100, and the Deluxe set sells for $115. The variable expenses associated with each set are given below.

	Standard		Deluxe
Variable production costs	$	35.00	$	50.00
Sales commissions (35% of sales price)	$	35.00	$	40.25

The company’s fixed expenses each month are:

Advertising	$	125,000
Depreciation	$	27,700
Administrative	$	73,000

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	6,000	4,000	10,000
May	3,000	7,000	10,000

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

1-a) Preparing the Contribution Format Income Statement for April:
Carbex, Inc.
Income Statement For April
	Standard			Deluxe			Total
	Amount	%		Amount	%		Amount	%
Sales	$600,000	100	%	$460,000	100	%	$1,060,000	100	%
Variable expenses:
Production	$210,000	35	%	$200,000	43.5	%	$410,000	38.7	%
Sales commission	$210,000	35	%	$161,000	35	%	$371,000	35	%
Total variable expenses	$420,000	70	%	$361,000	78.5	%	$781,000	73.7	%
Contribution margin	$180,000	30	%	$99,000	21.5	%	$279,000	26.3	%
Fixed expenses:
Advertising							$125,000
Depreciation							$27,700
Administrative							$73,000
Total fixed expenses							$225,700
Net operating income							$53,300

1-b) Preparing the Contribution Format Income Statement for May:
Carbex, Inc.
Income Statement For May
	Standard			Deluxe			Total
	Amount	%		Amount	%		Amount	%
Sales	$300,000	100	%	$805,000	100	%	$1,105,000	100	%
Variable expenses:
Production	$105,000	35	%	$350,000	43.5	%	$455,000	41.2	%
Sales commission	$105,000	35	%	$281,750	35	%	$386,750	35	%
Total variable expenses	$210,000	70	%	$631,750	78.5	%	$841,750	76.2	%
Contribution margin	$90,000	30	%	$173,250	21.5	%	$263,250	23.8	%
Fixed expenses:
Advertising							$125,000
Depreciation							$27,700
Administrative							$73,000
Total fixed expenses							$225,700
Net operating income							$37,550

3-a) Calculation of the Break-Even Point in Dollars Sales for April:

Dollar Sale to Break Even= Fixed Expense/ CM Ratio

Dollar Sales to break Even= $225700/0.263

Dallar Sales to break Even= $858175

Hence, the Dollar Sales to breakeven is $858175

3(b): The BreakEven is Higher with may's Sales Mis that with April's Sales