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 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. Income statement for April

	Standard	Deluxe	Total(in $)
Sales(A)	=4600*$72 =$331200	=2600*$87 =$226200	557400
Less :Expenses
Variable production Cost	=4600*21 =$96600	=2600*$36 =$93600	190200
Sales commission	=4600*15.12 =$69552	=2600*18.27 =$47502	117054
Advertising			111,000
Depreciation			23,500
Administrative			66,000
Total Expenses(B)			507754
Net Income C=(A-B)			$49646

1-b. Income statement for May

	Standard	Deluxe	Total(in $)
Sales(A)	=1600*$72 =$115200	=5600*$87 =$487200	602400
Less :Expenses
Variable production Cost	=1600*21 =$33600	=5600*$36 =$201600	235200
Sales commission	=1600*15.12 =$24192	=5600*18.27 =$102312	126504
Advertising			111,000
Depreciation			23,500
Administrative			66,000
Total Expenses(B)			562204
Net Income C=(A-B)			$40196

3-a. Computation of break-even point in dollar sales for April.

Breakeven points in Units=Fixed cost / Sales price per unit- Variable cost per unit

Standard Product

=           Advertising + Depreciation+ Administrative

        Total sales price per unit of Standard product set-variable cost

=111000+23500+66000 = 1.214

    (72-21-15.12) *4600

Breakeven point in Dollars= Sales price per unit X Break even points in Units  

Standard Product=72X 1.214

                           =87.46

Deluxe Product

Breakeven points in Units=Fixed cost / Sales price per unit- Variable cost per unit

                       111000+23500+66000 =$2.356

                                                (87-36-18.27)*2600

Breakeven point in Dollars= Sales price per unit X Break even points in Units   =87 X 2.356 =204.98

Breakeven Point in April

	Standard	Deluxe
Breakeven point in Dollars(per unit)	87.46	204.98
No of units	4600	2600
total	402316	532948

3-b. To analyse whether the breakeven point in May higher than or lower to April, we need to calculate the breakeven point for the month of May for both the set.

Breakeven point for may

Breakeven points in Units=Fixed cost / Sales price per unit- Variable cost per unit

Standard Product

=           Advertising + Depreciation+ Administrative

        Total sales price per unit of Standard product set-variable cost

=111000+23500+66000 = 3.49

    ( 72-21-15.12)*1600

Breakeven point in Dollars= Sales price per unit X Break even points in Units  

Standard Product=72X 3.49

                           =251.46

Deluxe Product

Breakeven points in Units=Fixed cost / Sales price per unit- Variable cost per unit

                       111000+23500+66000 =1.093

                                                (87-36-18.27)*5600

Breakeven point in Dollars= Sales price per unit X Break even points in Units   =87 X 1.093 =95.169

May

		Standard			Deluxe
Breakeven point in Dollars(per unit)		251.46			95.169
No of units		1600			5600
total		402336			532946.4
	April		May
Standard	402316		402336
Deluxe	532948		532946.4

The breakeven point in case of standard set is higher in May as compared to April due to less no. of units.

The breakeven point in case of deluxe set is lower in May as compared to April due to higher no. of units