European Standard and European Deluxe

World Travelers Corporation, Inc. makes two products – European Standard and European Deluxe. Selected information on the products is given below:

European StandardEuropean Deluxe
Selling Price per unit:$200.00$300.00
Variable expenses per unit:
              Production$110.00$210.00
Commission (10% of selling price)$20.00$30.00

The company has the following fixed costs:

Per Month
Fixed production costs$160,000
Advertising expense150,000
Administrative salaries110,000
Total:420,000

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

European StandardEuropean DeluxeTotal
January(units sold)10,0005,00015,000
February(units sold)5,00010,00015,000

Required:

  1. Prepare contribution income statements for January and February. Use Exhibit 5-4 on page 211 as an example.
  2. Compute the company’s break-even point (BEP) in dollar sales for January and February.
  3. To meet customer demand the company decides to use a higher quality material for the European Deluxe product starting in the month of March. This decision drives the production cost to $255 per unit. Prepare a contribution income statement for March assuming that the activity matches the activity level in February:
European StandardEuropean DeluxeTotal
March(units sold)5,00010,00015,000
  1. Compute the company’s break-even point in dollar sales for March.
  2. Assume that in addition to the cost structure change in March, the entire Sales Department is requesting a switch from commission compensation to salary compensation. This will eliminate the commission variable cost but will create additional fixed cost of $450,000. Prepare a contribution income statement and compute the break-even point in dollar sales for the new cost structure (use the data given in instructions 3 & 5).

6.The CFO of the company assigns you to research the following two issues:

  • To analyze the impact on the break-even point in instructions 3 and 5. Do you support the decisions made? Why or why not.
  • Perform an analysis on the current and proposed sales compensation structure. What strategies can be implemented in the sales commission structure to result in increased profits and efficiency for the company?

Write an official memo to the president of the company to disclose your findings and possible recommendations.

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