Carbex, Inc., produces cutlery sets out of high-quality wood and steel. The comp
ID: 2392478 • Letter: C
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 $88, and the Deluxe set sells for $103. 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 $ 29.00 $ 44.00 Sales commissions (29% of sales price) $ 25.52 $ 29.87Explanation / Answer
1a) Income statement for April under Contribution format: Standard Deluxe Amount $ Sales 88 103 825400 Less: Variable costs 54.52 73.87 545566 Contribution 33.48 29.13 279834 Less: Fixed costs 214900 NOI 64934 1b) Income statement for May under Contribution format: Standard Deluxe Amount $ Sales 88 103 870400 Less: Variable costs 54.52 73.87 603616 Contribution 33.48 29.13 266784 Less: Fixed costs 214900 NOI 51884 3a) Standard Deluxe Contri 33.48 29.13 sales 475200 350200 sales ratio 0.58 0.42 Proportional contribution 33.48*0.58=19.42 29.13*0.42=12.23 Total proportional contribution= $31.65 Fixed cost = 214900 Break Even Point (units)= Fc / contri = 214900/31.65= 6791 Standard units at BEP = 6791*0.58=3939 Deluxe units at BEP = 6791 * 0.42 = 2852 Break Even Point (dollars)= 3939*88+2852*103= 640388 3b) As the sales in may of standard, with high contribution, is low, so BEP would be higher to that of April.