P3–16 Sales mix; commission structure; break-even point Time allowed: 60 minutes Carbex Ltd 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 (in cost per set):

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:

Required 1 Prepare a profit and loss account for April and a profit and loss account for May. Use the contribution format, with the following headings:

Place the fixed expenses only in the Total column. Carry percentage computations to one decimal place. Do not show percentages for the fixed expenses.
2 Explain why there is a difference in profit 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 optimize the sales mix?
4

(a) Using April’s figures, what was the break-even point for the month in sales pounds?

(b) Has May’s break-even point gone up or down from that of April?
Explain your answer without calculating the break-even point for May.

Transcribed Image Text:

Standard Production costs 15.00 Sales commissions (15% of sales price) 9.00 The company's fixed Advertising 105,000 Depreciation Administrative 21,700 63,000 Deluxe 30.00 11.25