Mini case #2 - Smith Company
Smith Company, a wholesale distributor, has been operating for only a few months. The company sells three products - sinks, mirrors, and vanities. Budgeted sales by product and in total for the coming month are shown below based on planned unit sales as follows:
|
|
Units
|
Percentage
|
|
Sinks
|
1,000
|
50%
|
|
Mirrors
|
500
|
25%
|
|
Vanities
|
500
|
25%
|
|
Total
|
2.000
|
100%
|
|
|
Sinks
|
Mirrors
|
Vanities
|
Total
|
|
Percentage of total sales
|
48%
|
20%
|
32%
|
100%
|
|
Sales
|
$240,000
|
100%
|
$100,000
|
100%
|
$160,000
|
100%
|
$500,000
|
100%
|
|
Variable expenses
|
72.000
|
30%
|
80,000
|
80%
|
88,000
|
55%
|
240,000
|
48%
|
|
Contribution margin
|
168,000
|
70%
|
20,000
|
20%
|
72,000
|
45%
|
260,000
|
52%
|
|
Contribution margin per unit
|
$168
|
|
$40
|
|
$144
|
|
|
|
|
Fixed Expenses
|
|
|
|
|
|
|
$223.600
|
|
|
Operating income
|
|
|
|
|
|
|
$36,400
|
|
Break-even point in sales dollars: $223,600/.52= $430,000
Break-even point in unit sales: $223,600/ $130** = 1,720 units
**Weighted average CM per unit ($168x.5) + ($40x.25) + ($144x.25) = $130
As shown by these data, operating income is budgeted at $36,400 for the month, break-even sales dollars at $430,000, and break-even unit sales at 1,720. Assume that actual sales for the month total $504,000 (2,100 units), with the CM ratio and per unit amounts the same as budgeted. Actual fixed expenses are the same as budgeted, $223,600. Actual sales by product are as follows: sinks, $126,000 (525 units); mirrors $210,000 (1,050 units); and vanities $168,000 (525 units).
Required:
1. Prepare a contribution format income statement for the month based on actual sales data. Present the income statement in the format shown above. Provide an explanation of the actual results as compared to budgeted. Your explanation should include:
- A comparison of operating income
- A comparison of sales mix
2. a) Compute the break-even point in sales dollars for the month, based on the actual data.
b) Calculate the break-even point in unit sales for the month, based on the actual data.
How does the actual break-even point differ from planned? Explain how the overall CM ratio and the weighted average contribution margin per unit compare to the budget.
3. Considering the fact that the company exceeded its $500,000 sales budget for the month, the president is shocked at the results shown on your income statement in (1) above. Prepare a brief memo for the president that provides him/her with an overview of why both the operating results and the breakeven point in sales dollars are different from what was budgeted. Make sure that you provide a clear explanation in words that the president can understand.
Note - You do not need to use the case preparation chart for this mini case.