Solutions Guide: Please reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as your own.

Goeing 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. Standard Deluxe 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 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 month 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 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.

Goeing, Inc.
Income Statement For April
Standard / Deluxe / Total
Amount / % / Amount / % / Amount / %
Sales / $240,000 / 100 / $150,000 / 100 / $390,000 / 100.0
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 variable expenses / 96,000 / 40 / 82,500 / 55 / 178,500 / 45.8
Contribution margin / $144,000 / 60 / $ 67,500 / 45 / $211,500 / 54.2
Fixed expenses:
Advertising / 105,000
Depreciation / 21,700
Administrative / 63,000
Total fixed expenses / 189,700
Net operating income / $21,800
Goeing, Inc.
Income Statement For May
Standard / Deluxe / Total
Amount / % / Amount / % / Amount / %
Sales / $60,000 / 100 / $375,000 / 100 / $435,000 / 100.0
Variable expenses:
Production / 15,000 / 25 / 150,000 / 40 / 165,000 / 37.9
Sales commission / 9,000 / 15 / 56,250 / 15 / 65,250 / 15.0
Total variable expenses / 24,000 / 40 / 206,250 / 55 / 230,250 / 52.9
Contribution margin / $36,000 / 60 / $168,750 / 45 / 204,750 / 47.1
Fixed expenses:
Advertising / 105,000
Depreciation / 21,700
Administrative / 63,000
Total fixed expenses / 189,700
Net operating income / $15,050

2. The sales mix has shifted over the last year from Standard sets to Deluxe sets. This shift has caused a decrease in the company’s overall CM ratio from 54.2% in April to 47.1% in May. For this reason, even though total sales (in dollars) are greater, net operating income is lower.

3. Sales commissions could be based on contribution margin rather than on sales price. A flat rate on total contribution margin, as the text suggests, might encourage the salespersons to emphasize the product with the greatest contribution to the profits of the firm.

4. a. The break-even in dollar sales can be computed as follows:

b. The break-even point is higher with May’s sales mix than with April’s. This is because the company’s overall CM ratio has gone down, i.e., the sales mix has shifted from the more profitable to the less profitable units.