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 $76, and the Deluxe set sells for $91. The variable expenses associated with each set are given below.

	Standard		Deluxe
Variable production costs	$	23.00	$	38.00
Sales commissions (23% of sales price)	$	17.48	$	20.93

The company’s fixed expenses each month are:

Advertising	$	113,000
Depreciation	$	24,100
Administrative	$	67,000

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	4,800	2,800	7,600
May	1,800	5,800	7,600

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. Contribution format income statement for April:

Sales:
Standard 4,800*76	364,800
Deluxe 2,800*91	254,800
Total Sales	619,600
Less: Variable costs
Standard 4,800*23	110,400
Deluxe 2,800*38	106,400
Total Variable Costs	216,800
Contribution Margin	402,800
Less: Fixed Costs
Advertising	113,000
Depreciation	24,100
Administrative	67,000
Total Fixed Costs	204,100
Operating profit	198,700

1-b. Contribution format income statement for May:

Sales:
Standard 1,800*76	136,800
Deluxe 5,800*91	527,800
Total Sales	664,600
Less: Variable costs
Standard 1,800*23	41,400
Deluxe 5,800*38	220,400
Total Variable Costs	261,800
Contribution Margin	402,800
Less: Fixed Costs
Advertising	113,000
Depreciation	24,100
Administrative	67,000
Total Fixed Costs	204,100
Operating profit	198,700

CM ratio for April = 402,800/619,600 = 65%

3-a. Break even point in dollar sales for April = Fixed Cost/CM Ratio

= 204,100/65%

= 314,000

CM ratio for May = 402,800/664,600

= 60.61%

Break Even point will be higher since contribution margin ratio is lower.