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Carsons, Inc. produces cutlery sets out of high-quality wood and steel. The company makes a standard cutlery set and a deluxe cutlery 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 costs associated with each set are given below:

Standard Deluxe

Production Costs $15.00 $30.00

Sales Commissions (15% Sales Price) $9.00 $11.25

Carsons incurs the following fixed costs each month:

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. The CFO watches sales commissions carefully and has noted that they have risen steadily over the last year. For this reason, the CFO 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:

Sales (# sets) Standard Deluxe Total

April 4,000 2,000 6,000

May 1,000 5,000 6,000

Required:

Prepare contribution format income statements for April and May. You may use the template provided on the next page. (HINT: Place fixed costs only in the Total column. Do not show percentages for the fixed costs)

Explain the difference in net operating incomes between the two months, even though the same total number of sets was sold in each month.

Using Aprils sales mix, what is the break-even point in total dollar sales at Carsons?

In May, what was the number of standard sets and number of deluxe sets (each, not total) that needed to be sold to break even? Use the sales mix ratio from May.

What do you recommend that the CFO does in June to ensure that profits dont drop again?

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