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 $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?

Solutions

Expert Solution

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.


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