Question

Barnes Company sells three products: A, B, and C. Budgeted sales by product and in total for the coming month are as follows:
	Product A			Product B
% of total sales	48%			20%
Sales	240,000	100%		$100,000	100%
Variable exp.	72000	30		80,000	80
Contribution mar.	168,000	70		20,000	20
Fixed expense
	Product C			Total
% of total sales	32%			100%
Sales	160,000	100%		500,000	100%
Variable exp.	88,000	55		240,000	48
Contribution margin	72,000	45		260,000	52
Fixed expense				223,600
Operating income				36,400
Break-even sales – Budgeted: Fixed Expenses / CM Ratio
= $223,600 / 0.52
$430,000.00
As shown by these data, operating income is budgeted at $36,400 for the month, and break-even sales at $430,000.
Assume that actual sales for the month total $500,000 as planned.
Actual sales by product are:
A $160,000
B $200,000
C $140,000
Required:
a) Prepare a contribution income statement for the month based on actual sales data. Assume variable expenses as a percentage of sales and total fixed expenses are the same as budgeted.
Present the income statement in the format shown in the images above.
b) Compute break-even sales for the month, based on actual data.
c) Explain why the company did not meet the budgeted operating results or break-even sales even though it met its $500,000 sales budget.

Answer 1

Answer:

Solution - A

Product A Product B Product C Total Percentage of total sales 32% 40% 28% 100% 100% Sales $160,000 100% $200,000 $140,000 100% $500,000 100% 80% 57% Variable expenses 48,000 30% 160,000 77,000 55% 285,000 43% Contribution margin $112,000 70% $ 40,000 $ 63,000 45% 215,000 223,600 Fixed expenses Net operating income (loss) $ (8,600)

Solution - B

Break-even sales: Dollar sales Fixed expenses to break even C M ratio $223,600 0.43 = $520,000 in sales

where CM ratio is calculated as 223,600/520,000 = 0.43

Solution - C

Despite the fact that the company met its sales budget, the budgeted sales mix is substantially different from the sales mix sold. This is why the budgeted net operating income was not met, and the reason the break-even sales were greater than budgeted. The company's sales mix was planned at 48% Sinks, 20% Mirrors, and 32% Vanities. The actual sales mix was 32% Sinks, 40% Mirrors, and 28% Vanities. Sinks provide the greatest contribution margin per dollar sales, yet the sales shifted away from this product and towards mirrors which provided the least contribution margin per sales dollar, Consequently, these sales provided less contribution margin than initially planned, with a resulting decrease in net operating income.