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 $94, and the Deluxe set sells for $109. The variable expenses associated with each set are given below.

	Standard		Deluxe
Variable production costs	$	32.00	$	47.00
Sales commissions (32% of sales price)	$	30.08	$	34.88

The company’s fixed expenses each month are:

Advertising	$	122,000
Depreciation	$	26,800
Administrative	$	71,500

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	5,700	3,700	9,400
May	2,700	6,700	9,400

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

1-a)					Carbex Inc
				Contribution income statement for April
				Standard			Deluxe			Total
				Amount	%		Amount	%		Amount	%
	Sales			535800	100	%	403300	100	%	939100	100	%
	Variable expenses:
	Variable production costs			182400	34.0	%	173900	43.1	%	356300	37.9	%
	Sales commission			171456	32.0	%	129056	32.0	%	300512	32.0	%
	Total variable expenses			353856	66.0	%	302956	75.1	%	656812	69.9	%
	Contribution margin			181944	34.0	%	100344	24.9	%	282288	30.1	%
	Fixed expenses:
	Advertising									122,000
	Depreciation									26,800
	Administrative									71,500
	Total fixed expenses									220,300
	Net income									61,988
1-b)					Carbex Inc
				Contribution income statement for May
				Standard			Deluxe			Total
				Amount	%		Amount	%		Amount	%
	Sales			253800	100	%	730300	100	%	984100	100	%
	Variable expenses:
	Variable production costs			86400	34.0	%	314900	43.1	%	401300	40.8	%
	Sales commission			81216	32.0	%	233696	32.0	%	314912	32.0	%
	Total variable expenses			167616	66.0	%	548596	75.1	%	716212	72.8	%
	Contribution margin			86184	34.0	%	181704	24.9	%	267888	27.2	%
	Fixed expenses:
	Advertising									122,000
	Depreciation									26,800
	Administrative									71,500
	Total fixed expenses									220,300
	Net income									47,588
3-a)	Break even point in dollar sales			731894
3-b)	Higher