Carbex, Inc. produces cutlery sets out of high-quality wood and steel. The compa
ID: 2414222 • 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 expenses associated with each set are given below. Standard set sells for $96, and the Deluxe set sells for S1m1. The variable Variable production costs Sales commissions (33% of sales price) 33.0 48.e 31.68 36.63 The company's fixed expenses each month are: Advertising Depreciation Administrative S 123,000 S 27,180 $ 72,08e Mary Parsons, the finencial 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 substantially from April. Sales, in sets, for the last two months are given below April May Standand Deluxe Total 5,8003,880 9,600 2,8806,8009,680 Required 1-a. Prepare contribution format income statements for April 1-b. Prepare contribution formet 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? Complete this question by entering your answers in the tabs below. Rea 1A Req 18 Req 3A Rea 3B Prepare contribution format income statements for April. (Round your Percentage" answers to 1 decimal place Q.e. 1234 should be entered as 12.3).)Explanation / Answer
Solution:
Carbex Inc
1-a. Contribution format income statement for April:
Contribution format income Statement for April
Standard
Deluxe
Total
Sales (units)
5,800
3,800
Sales price
$96
$111
Sales
$556,800
$421,800
$978,600
Variable costs:
Production Costs
$191,400
$182,400
$373,800
sales commission
$183,744
$139,194
$322,938
total variable cost
$375,144
$321,594
$696,738
Contribution margin
$181,656
$100,206
$281,862
Fixed costs:
Advertising
$123,000
Depreciation
$27,100
Administrative
$72,000
Total fixed costs
$222,100
Net Income
$59,762
Notes:
Production costs –
Standard = 5,800 x $33 = $191,400
Deluxe = 3,800 x $48 = $182,400
Sales commissions –
Standard = 5,800 x $31.68 = $183,744
Deluxe = 3,800 x $36.63 = $139,194
1-b. Contribution Format Income Statement for May:
Standard
Deluxe
Total
Sales (units)
2,800
6,800
Sales price
$96
$111
Sales
$268,800
$754,800
$1,023,600
Variable costs:
Production Costs
$92,400
$326,400
$418,800
sales commission
$88,704
$249,084
$337,788
total variable cost
$181,104
$575,484
$756,588
Contribution margin
$87,696
$179,316
$267,012
Fixed costs:
Advertising
$123,000
Depreciation
$27,100
Administrative
$72,000
Total fixed costs
$222,100
Net Income
$44,912
3-a. Break-even point in dollar sales for April:
Break-even point in dollar sales = fixed costs/contribution margin ratio
Weighted average Contribution margin ratio = sum of contribution of the two products/sum of sales of the two products
Sum of contribution of the two products for April = $281,862
Sum of sales of the two products = $978,600
Weighted average contribution margin ratio = (281,862/978,600) x100 = 28.8%
Total fixed costs = $222,100
Break-even point in dollar sales for April = $222,100/28.8% = $771,181
Break-even point in dollar sales – Standard = $771,181 x (5,800/9,600) = $465,922
Break-even point in dollar sales – Deluxe = $771,181 x (3,800/9,600) = $305,259
3-b. Would the break-even point in May be higher or lower than the break-even point in April:
The break-even point in May would be higher than the break-even point in April.
Explanation:
The total contribution margin in May is lower than the total contribution margin in April. Hence, the contribution margin ratio would also be lower. A lower contribution margin ratio would result in higher break-even point in dollars. Hence, the break-even point in May would be higher than the break-even point in April as shown by the computations below,
Total contribution margin in May = $267,012
Total sales in May = $1,023,600
Contribution margin ratio = (267,012/1,023,600) x 100 = 26.10%
Total fixed costs = $222,100
Break-even point in dollar sales = $222,100/26.1% = $851,428
Contribution format income Statement for April
Standard
Deluxe
Total
Sales (units)
5,800
3,800
Sales price
$96
$111
Sales
$556,800
$421,800
$978,600
Variable costs:
Production Costs
$191,400
$182,400
$373,800
sales commission
$183,744
$139,194
$322,938
total variable cost
$375,144
$321,594
$696,738
Contribution margin
$181,656
$100,206
$281,862
Fixed costs:
Advertising
$123,000
Depreciation
$27,100
Administrative
$72,000
Total fixed costs
$222,100
Net Income
$59,762