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 $72, and the Deluxe set sells for $87. The variable expenses associated with each set are given below.

	Standard		Deluxe
Variable production costs	$	21.00	$	36.00
Sales commissions (21% of sales price)	$	15.12	$	18.27

The company’s fixed expenses each month are:

Advertising	$	111,000
Depreciation	$	23,500
Administrative	$	66,000

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	4,600	2,600	7,200
May	1,600	5,600	7,200

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]		Standard	Deluxe	Total
	Sales price per unit	$            72.00	$          87.00
	Sales in units	4600	2600
	Variable production costs per unit	$            21.00	$          36.00
	Sales commissions per unit [21%]	$            15.12	$          18.27
	Sales revenue	$      3,31,200	$    2,26,200	$   5,57,400
	Variable expenses:
	Prodution	$         96,600	$        93,600	$   1,90,200
	Sales	$         69,552	$        47,502	$   1,17,054
	Total variable expenses	$      1,66,152	$ 1,41,102	$   3,07,254
	Contribution margin	$      1,65,048	$        85,098	$   2,50,146
	Fixed costs:
	Advertising			$   1,11,000
	Depreciation			$ 23,500
	Administrative			$ 66,000
	Total fixed costs			$   2,00,500
	Net operating income			$ 49,646
1-b]		Standard	Deluxe	Total
	Sales price per unit	$            72.00	$          87.00
	Sales in units	1600	5600
	Variable production costs per unit	$            21.00	$          36.00
	Sales commissions per unit [21%]	$            15.12	$          18.27
	Sales revenue	$      1,15,200	$    4,87,200	$   6,02,400
	Variable expenses:
	Prodution	$         33,600	$    2,01,600	$   2,35,200
	Sales	$         24,192	$    1,02,312	$   1,26,504
	Total variable expenses	$         57,792	$    3,03,912	$   3,61,704
	Contribution margin	$         57,408	$    1,83,288	$   2,40,696
	Fixed costs:
	Advertising			$   1,11,000
	Depreciation			$ 23,500
	Administrative			$ 66,000
	Total fixed costs			$   2,00,500
	Net operating income			$ 40,196
3-a]	Sales mix for April	23	13
	Contribution margin per unit	$            35.88	$          32.73
	Weighted average contribution margin ratio = 250146/557400 =			44.88%
	BEP in $ for April = 200500/44.88% =			$   4,46,774
3-b]	Sales mix for May	2	7
	Weighted average contribution margin ratio = 240696/602400 =			39.96%
	The BEP in may will be higher as the weighted CM ratio is lower.
	The BEP in $ would be 200500/39.96% =			$   5,01,800