Question

Problem 6-28 Sales Mix; Commission Structure; Multiproduct Break-Even Analysis [LO6-9]

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 $86, and the Deluxe set sells for $101. The variable expenses associated with each set are given below.

	Standard		Deluxe
Variable production costs	$	28.00	$	43.00
Sales commissions (28% of sales price)	$	24.08	$	28.28

The company’s fixed expenses each month are:

Advertising	$	118,000
Depreciation	$	25,600
Administrative	$	69,500

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	5,300	3,300	8,600
May	2,300	6,300	8,600

Required:

1-a. Prepare contribution format income statement for April.

1-b. Prepare contribution format income statement 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

1A	Contribution Margin Statement for April:
		Standard	Deluxe	Total		Standard	Deluxe
	Sales	455,800	333,300	789,100		5300*86	3300*101
	Less: Variable Production Cost	148,400	141,900	290,300		5300*28	3300*43
	Less: Sales Commission	127,624	93,324	220,948		5300*24.08	3300*28.28
	Contribution Margin	179,776	98,076	277,852
	Less: Fixed Cost			213,100
	Net Operating Income			64,752
1B	Contribution Margin Statement for May:
		Standard	Deluxe	Total		Standard	Deluxe
	Sales	197,800	636,300	834,100		2300*86	6300*101
	Less: Variable Production Cost	64,400	270,900	335,300		2300*28	6300*43
	Less: Sales Commission	55,384	178,164	233,548		2300*24.08	6300*28.28
	Contribution Margin	78,016	187,236	265,252
	Less: Fixed Cost			213,100
	Net Operating Income			52,152
3A	Contribution Margin Statement for April:						Standard	Deluxe	Total
		Standard	Deluxe	Total		Sales Mix:	5300	3300	8600
	Sales	455,800	333,300	789,100			61.63%	38.37%
	Less: Variable Production Cost	148,400	141,900	290,300
	Less: Sales Commission	127,624	93,324	220,948
	Contribution Margin	179,776	98,076	277,852
	Contribution Margin Ratio			35.21%
	Contribution Margin PU	33.92	29.72
	Fixed Cost	213,100
	Contribution Margin Ratio	35.21%
	Break Even Point in Dollars	605,204.25
3B	The Break even point will be higher since the sales mix has changed, it would be higher because product having higher Contribution margin PU has reduced sales Unit and product with lower contribution margin PU has increased sales Units