ABC, Inc., produces widgets. The company manufactures three levels of widgets-Economy, Better and Best. Selected information on the widgets is given below.

Economy Better Best

Selling price per widget $45.00 $70.00 $85.00

Variable expense per widget production $23.00 $27.00 $32.00

Selling (5% of selling price) $2.25 $3.50 $5.00

All sales are made through the companys own retail outlets. The widgets have the following fixed costs.

Per Month

Fixed production costs $130,000

Advertising expense 120,000

Administrative salaries 65,000

Total $315,000

Sales, in units, over the past two months have been as follows:

Economy Better Best Total

April 2,000 1,000 5,000 8,000

May 9,000 1,000 2,000 12,000

Required:

1. Prepare contribution format income statements for April and May. Place the fixed expenses only in the Total column. Do not show percentages for the fixed expenses.

Use the following headings:

Economy Better Best Total

Amount Percent Amount Percent Amount Percent Amount Percent

Sales

Etc

2. Upon seeing the income statements in (1) above, the president stated, I cant believe this! We sold 50% more widgets in May than in April, yet profits went down. Its obvious that costs are out of control. What other explanation can you give for the drop in net operating income? (Provide at least a paragraph for your explanation)

3. Compute the widgets break-even point in dollar sales for April.

4. Without doing calculations, explain whether the break-even point would be higher or lower with Mays sales mix than with Aprils sales mix.

5. Assume that sales of the Economy widgets increase by $20,000. What would be the effect on net operating income? What would be the effect if the Best widget sales increased by $20,000? Do not prepare income statements; use the incremental analysis approach in determining your answer.