Question

Use Excel to show your work and include the formula in the cell to show how you arrived at your figures. Round percentages (example if 49.2, round to 49).

Background:

ABC, Inc., produces widgets. The company manufactures three levels of widgets-Economy, Better and Best. Selected information on the widgets is given below.

	Economy	Better	Best
Selling price per widget	$40.00	$60.00	$90.00
Variable expense per widget production	$22.00	$27.00	$31.50
Selling (5% of selling price)	$2.00	$3.00	$4.50

All sales are made through the company’s own retail outlets. The widgets have the following fixed costs.

	Per Month
Fixed production costs	$120,000
Advertising expense	100,000
Administrative salaries	50,000
Total	$270,000

Sales, in units, over the past two months have been as follows:

	Economy	Better	Best	Total
April	2,000	1,000	5,000	8,000
May	8,000	1,000	3,000	12,000

Required:

1. Prepare contribution format income statements for April and May. Place the fixed expenses only in the Total column. Do not show percentages for the fixed expenses.

Use the following headings:

Economy

Better

Best

Total

Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent

Sales

Etc…

2. Upon seeing the income statements in (1) above, the president stated, “I can’t believe this! We sold 50% more widgets in May than in April, yet profits went down. It’s obvious that costs are out of control.” What other explanation can you give for the drop in net operating income?

3. Compute the widgets break-even point in dollar sales for April.

4. Without doing calculations, explain whether the break-even point would be higher or lower with May’s sales mix than with April’s sales mix.

5. Assume that sales of the Economy widgets increase by $20,000. What would be the effect on net operating income? What would be the effect if the Best widget sales increased by $20,000? Do not prepare income statements; use the incremental analysis approach in determining your answer.

Answer 1