Problem 5-28 Sales Mix; Commission Structure; Multiproduct Break-Even Analysis [
ID: 2336269 • Letter: P
Question
Problem 5-28 Sales Mix; Commission Structure; Multiproduct Break-Even Analysis [LO5-9] 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 $80, and the Deluxe set sells for $95. The variable expenses associated with each set are given below Variable production costs Sales commissions (25% of sales price) Standard Deluxe $ 25.00 40.00 s 20.0 23.75 The company's fixed expenses each month are Advertising Depreciation Administrative $ 115,000 $ 24,700 $ 68,000 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: April May Standard Deluxe Total 8,000 8,000 5,000 2,000 3,000 6,000 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?Explanation / Answer
1A) Carbex Inc. Income statement for April Standard Deluxe Total Amount % Amount % Amount % Sales 400000 100 % 285000 100 % 685000 100 % Variable expense : Production cost 125000 31 % 120000 42 % 245000 35.7 % Sales commission 100000 25 % 71250 25 % 171250 25 % Total variable expenses 225000 56 % 191250 67 % 416250 60.7 % Contribution Margin 175000 44 % 93750 33 % 268750 39.3 % Fixed expense : Advertising 115000 16.8 % Depreciation 24700 3.6 % Administrative 68000 9.9 % Total fixed expense 207700 30.3 % Net operating income 61050 9.0 % 1A) Carbex Inc. Income statement for May Standard Deluxe Total Amount % Amount % Amount % Sales 160000 100 % 570000 100 % 730000 100 % Variable expense : Production cost 50000 31 % 240000 42 % 290000 39.7 % Sales commission 40000 25 % 142500 25 % 182500 25 % Total variable expenses 90000 56.00 % 382500 67 % 472500 64.7 % Contribution Margin 70000 44 % 187500 33 % 257500 35.3 % Fixed expense : Advertising 115000 15.8 % Depreciation 24700 3.4 % Administrative 68000 9.3 % Total fixed expense 207700 28.5 % Net operating income 49800 6.8 % 3A) Break even point in $ For April, Break even point in $ sales = Fixed cost / PV ratio PV ratio or contribution to sales ratio 39.30% Break even sales 528498.7 3B) Break even point in $ For May' Break even point in $ sales = Fixed cost / PV ratio PV ratio or contribution to sales ratio 35.3 Break even sales 588385.3 Break even point in May is higher when compared to the month of april. Because of low PV ratio..