Question 17. Carbex, Inc., produces cutlery sets out of high-quality wood and st

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Question 17. Carbex, Inc., produces cutlery sets out of high-quality wood and steel. The company makes a standard cutlery set and a deluxe set and sells them to retail department stores throughout the country. The standard set sells for $98, and the deluxe set sells for $113. The variable expenses associated with each set are given below.

The company’s fixed expenses each month are:

Salespersons are paid on a commission basis to encourage them to be aggressive in their sales efforts. 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:

Prepare contribution format income statements for April. Round "Total percent" answers to 1 decimal place (i.e .1234 should be entered as 12.3).

Prepare contribution format income statements for May. Round "Total percent" answers to 1 decimal place (i.e .1234 should be entered as 12.3).

Compute the break-even point in dollar sales for April. (Round intermediate percentage calculations to 1 decimal place.)

Whether the break-even point would be higher or lower with May's sales mix than with April’s sales mix.

Question 17. Carbex, Inc., produces cutlery sets out of high-quality wood and steel. The company makes a standard cutlery set and a deluxe set and sells them to retail department stores throughout the country. The standard set sells for $98, and the deluxe set sells for $113. The variable expenses associated with each set are given below.

Explanation / Answer

1-a) CONTRIBUTION FORMAT INCOME STATEMENT FOR APRIL: Standard Deluxe Total % Sales in number of sets 5900 3900 9800 Sales revenue 578200 440700 1018900 100.0% Variable expenses: Production cost 200600 191100 391700 38.4% Sales commission 196588 149838 346426 34.0% Total variable expenses 397188 340938 738126 72.4% Contribution margin 181012 99762 280774 27.6% Fixed expenses: Advertising 124000 12.2% Depreciation 27400 2.7% Administrative 72500 7.1% Total fixed expenses 223900 22.0% Net operating income 56874 5.6% 1-b) CONTRIBUTION FORMAT INCOME STATEMENT FOR MAY: Standard Deluxe Total % Sales in number of sets 2900 6900 9800 Sales revenue 284200 779700 1063900 100.0% Variable expenses: Production cost 98600 338100 436700 41.0% Sales commission 96628 265098 361726 34.0% Total variable expenses 195228 603198 798426 75.0% Contribution margin 88972 176502 265474 25.0% Fixed expenses: Advertising 124000 11.7% Depreciation 27400 2.6% Administrative 72500 6.8% Total fixed expenses 223900 21.0% Net operating income 41574 3.9% 3-a) BREAKEVEN POINT IN DOLLAR SALES FOR APRIL: Contribution margin ratio for April = 27.60% Break even point in $ for April = Fixed costs/CM ratio = 223900/27.60% =   $      8,11,232 3-b) The Breakeven point with May's sales mix will be higher as the CM ratio for May is lower at 25% (April 27.6%). BEP in $ for May = 223900/25% = $      8,95,600

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