Carbex, Inc., produces cutlery sets out of high-quality wood and steel. The company makes a standard cutlery 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.
The company’s fixed expenses each month are:
Salespersons are paid on a commission basis to encourage them to be aggressive in their sales efforts. 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:
1. Prepare contribution format income statements for April and May. Use the following headings:
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.
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 sales dollars?
b. Without doing any calculations, explain whether the break-even points would be higher or lower with May’s sales mix than April’s sales mix.