Carbex Inc produces cutlery sets out of highquality wood and

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 $100, and the Deluxe set sells for $115. The variable expenses associated with each set are given below.

The company’s fixed expenses each month are:

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:

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-b. Would the break-even point in May be higher or lower than the break-even point in April?

	Standard	Deluxe
Variable production costs	$	35.00	$	50.00
Sales commissions (35% of sales price)	$	35.00	$	40.25

Solution

1-a) Preparing the Contribution Format Income Statement for April: Carbex, Inc. Income Statement For April Standard Deluxe Total Amount % Amount % Amount % Sales $600,000 100 % $460,000 100 % $1,060,000 100 % Variable expenses: Production $210,000 35 % $200,000 43.5 % $410,000 38.7 % Sales commission $210,000 35 % $161,000 35 % $371,000 35 % Total variable expenses $420,000 70 % $361,000 78.5 % $781,000 73.7 % Contribution margin $180,000 30 % $99,000 21.5 % $279,000 26.3 % Fixed expenses: Advertising $125,000 Depreciation $27,700 Administrative $73,000 Total fixed expenses $225,700 Net operating income $53,300 1-b) Preparing the Contribution Format Income Statement for May: Carbex, Inc. Income Statement For May Standard Deluxe Total Amount % Amount % Amount % Sales $300,000 100 % $805,000 100 % $1,105,000 100 % Variable expenses: Production $105,000 35 % $350,000 43.5 % $455,000 41.2 % Sales commission $105,000 35 % $281,750 35 % $386,750 35 % Total variable expenses $210,000 70 % $631,750 78.5 % $841,750 76.2 % Contribution margin $90,000 30 % $173,250 21.5 % $263,250 23.8 % Fixed expenses: Advertising $125,000 Depreciation $27,700 Administrative $73,000 Total fixed expenses $225,700 Net operating income $37,550 3-a) Calculation of the Break-Even Point in Dollars Sales for April: Dollar Sale to Break Even= Fixed Expense/ CM Ratio Dollar Sales to break Even= $225700/0.263 Dallar Sales to break Even= $858175 Hence, the Dollar Sales to breakeven is $858175 3(b): The BreakEven is Higher with may\'s Sales Mis that with April\'s Sales