PROBLEM 5-28 (HAL 236)

PROBLEM 5–28 Sales Mix; Commission Structure; Multiproduct Break-Even Analysis

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 $60, and the Deluxe set sells for $75. The variable expenses associated
with each set are given below.

Standard Deluxe

Variable production costs . . . . . . . . . . . . . . . . . . . . . . . . . . . $15.00 $30.00

Sales commissions (15% of sales price) . . . . . . . . . . . . . . . $9.00 $11.25

The company’s fixed expenses each month are:

Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105,000

Depreciation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,700

Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $63,000

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:

Standard Deluxe Total

April . . . . . . . . . . . . . . . . . . . . . . . 4,000 2,000 6,000

May . . . . . . . . . . . . . . . . . . . . . . . 1,000 5,000 6,000

Required:

1. Prepare contribution format income statements for April and May. Use the following
headings:

Standard Deluxe Total

Amount Percent Amount Percent Amount Percent

Sales . . . . . . . .

Etc. . . . . . . . . .

Answer :
 Format income statements for April

Carbex, Inc
Statement of
income for
april
standard Deluxe Total
Amount % Amount % Amount %
Sales ($60x4000) and $240,000 100 $150,000 100 $390,000 100.0
($75x2000)
Variable expenses :
Production 60,000 25 60,000 40 120,000 30.8
Sales commission 36,000 15 22,500 15 58,500 15.0
Total of variable expenses 96,000 40 82,500 55 178,000 45.8
Contribution margin in $ $144,000 60 $67,500 45 $211,500 54.2
Fixed expenses :
Advertising expense 105,000
Depreciation expense 21,700
Administrative expense 63,000
Total fixed expenses 189,700
Net operating income $21,800

format income statements for May

Carbex, Inc
Statement of
income for
May
standard Deluxe Total
Amount % Amount % Amount %
Sales ($60x1000) and $60,000 100 $375,000 100 $435,000 100.0
($75x5000)
Variable expenses :
Production 15,000 25 150,000 40 165,000 37.8
Sales commission 9,000 15 56,250 15 65,250 15.0
Total of variable expenses 24,000 40 206,250 55 230,250 52,9
Contribution margin in $ $36,000 60 $168,750 45 $204,750 47.1
Fixed expenses :
Advertising expense 105,000
Depreciation expense 21,700
Administrative expense 63,000
Total fixed expenses 189,700
Net operating income $15,050

Place the fixed expenses only in the Total column. Do not show percentages for the fixed expenses.

2. Explain the difference in net operating incomes between the two months, even though the
same total number of sets was sold in each month.
The mix of sales has moved from standard to deluxe sets during the last year. This shift has brought
about a reduction of 54.2% in April to 47.1% in May for the overall CM ratio of the company.
Therefore the net operating revenue is lower, even if total sales (in dollars) were higher.

3. What can be done to the sales commissions to improve the sales mix?
a. Using April’s sales mix, what is the break-even point in dollar sales?

Requirement Formula Workings answer

b. Without doing any calculations, explain whether the break-even point in May would be
higher or lower than the break-even point in April. Why?

For May’s sales mix, the break-even rate is higher than for April. The fact that the average CM ratio
of the business has fallen, meaning that the revenue mix has changed from the more lucrative to the
less profitable ones.