Question

Carbex, Inc., produces cutlery sets out of high-quality wood and steel. The company makes a Standard set and a Deluxe set and sell then department stores throughout the country. The Standard set sells for $98, and the Deluxe et sells for $113. The variable expenses and set are given below. Standard Deluxe Variable production costs $ 34.00 $ 49.00 Sales commissions (34% of sales price) $ 33.32 $ 38.42 The company's fixed expenses each month are: Advertising Depreciation Administrative $ 124,000 $ 27,400 $ 72,500 Mary Parsons, the financial vice president, watches sales commissions carefully and has noted that they have risen steadily over the reason, she was shocked to find that even though sales have increased, profits for the current month-May-are down substantially sets, for the last two months are given below. Standard 5,900 2.900 Deluxe 3,900 April May Total 9,800 9,800 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 3-5. Would the break-even point in May be higher or lower than the break-even point in April?

Answer 1

1-a)

Carbex Inc
Income Statement for April
	Standard		Deluxe		Total
	Amount	%	Amount	%	Amount	%
Sales Value	578,200.00	100.0%	440,700.00	100.0%	1,018,900.00	100.0%
Variable Expenses :
Variable Production Costs	200,600.00	34.7%	191,100.00	43.4%	391,700.00	38.4%
Sales Commission	196,588.00	34.0%	149,838.00	34.0%	346,426.00	34.0%
Total Variable Costs	397,188.00	68.7%	340,938.00	77.4%	738,126.00	72.4%
Contribution Margin	181,012.00	31.3%	99,762.00	22.6%	280,774.00	27.6%
Fixed Expenses
Advertising					124,000.00
Depreciation					27,400.00
Administrative					72,500.00
Total Fixed Expenses					223,900.00
Net Income					56,874.00

1-b)

Carbex Inc
Income Statement for May
	Standard		Deluxe		Total
	Amount	%	Amount	%	Amount	%
Sales Value	284,200.00	100.0%	779,700.00	100.0%	1,063,900.00	100.0%
Variable Expenses :
Variable Production Costs	98,600.00	34.7%	338,100.00	43.4%	436,700.00	41.0%
Sales Commission	96,628.00	34.0%	265,098.00	34.0%	361,726.00	34.0%
Total Variable Costs	195,228.00	68.7%	603,198.00	77.4%	798,426.00	75.0%
Contribution Margin	88,972.00	31.3%	176,502.00	22.6%	265,474.00	25.0%
Fixed Expenses
Advertising					124,000.00
Depreciation					27,400.00
Administrative					72,500.00
Total Fixed Expenses					223,900.00
Net Income					41,574.00

3a) Break even in Dollar Sales =223,900/27.6% = 811,231.88

3b) Break even in May will be higher than april