Question

PROBLEM 5-28 Sales Mix; Commission Structure; Multiproduct Break-Even Analysis LO5-9 Carbex, Inc., produces cutlery sets out of high-quality wood and steel. The company makes a Stan- dard set and a Deluxe set and sells them to retail department stores throughout the country. The Standard set sells for $60, and the Deluxe set sells for $75. The variable expenses associated with each set are given below. Standard Deluxe Variable production costs........................... Sales commissions (15% of sales price) ............... $15.00 $9.00 $30.00 $11.25 The company's fixed expenses each month are: Advertising .......... Depreciation .......... Administrative ............ $ 105,000 $21,700 $63,000 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: April ......... May ............ Standard 4,000 1,000 Deluxe 2,000 5,000 Total 6,000 6,000

Answer 1

1.

Income Statement for April

Carbex, Inc.
Statement of Income For April
	Standard		Deluxe			Total
	Amount	%	Amount		%	Amount	%
Sales ($60*4000 & $75*2000)	$240,000	100	$150,000	100		$390,000	100.0
Variable expenses:
Production	60,000	25	60,000	40		120,000	30.8
Sales commission	36,000	15	22,500	15		58,500	15.0
Total of variable expenses	96,000	40	82,500	55		178,500	45.8
Contribution margin in $	$144,000	60	$ 67,500	45		$211,500	54.2
Fixed expenses:
Advertising expense						105,000
Depreciation expense						21,700
Administrative expense						63,000
Total fixed expenses						189,700
Net operating income						$ 21,800

Income Statement for May

Carbex, Inc.
Statement of Income For May
	Standard		Deluxe		Total
	Amount	%	Amount	%	Amount	%
Sales ($60*1000 & $75*5000)	$60,000	100	$375,000	100	$435,000	100.0
Variable expenses:
Production	15,000	25	150,000	40	165,000	37.9
Sales commission	9,000	15	56,250	15	65,250	15.0
Total of variable expenses	24,000	40	206,250	55	230,250	52.9
Contribution margin in $	$36,000	60	$168,750	45	204,750	47.1
Fixed expenses:
Advertising expense					105,000
Depreciation expense					21,700
Administrative expense					63,000
Total of fixed expenses					189,700
Net operating income					$ 15,050

2. The mix of sales has moved from Standard to Deluxe sets during the last year. This shift has brought about a reduction of 54.2% in April to 47.1% in May for the overall CM ratio of the company. Therefore the net operating revenue is lower, even if total sales (in dollars) were higher.

3. Instead of sale prices, sales fees could be based on investment margin. A flat rate on the overall contribution margin may induce the sellers to make a major contribution to the income of the business with regard to the commodity.

3.   a.   The break-even of $ sales can be calculated as follows:

           

Requirement	Formula	Workings	Answer
Break-Even for Dollar Sales	Fixed Expense/CM Ratio	$189,700/0.542	$350,000

      b.   For May's sales mix, the break-even rate is higher than for April. The fact that the average CM ratio of the business has fallen, meaning that the revenue mix has changed from the more lucrative to the less profitable ones.