The manager of Royal Industries Ltd. is confused by the income statement he has received from his accountant. He is particularly concerned that his return on sales declined much more than sales in February as compared to January.

Income Statement

The manager informs you that in salaries, wages, and commissions, the accountant included the salaries of several clerks and himself. All salesmen work on commissions @ 20 per cent of sales. Expenses on account of supplies vary directly with sales. For various reasons, sales in February were expected to decline by ₹75,000. But he had expected income of ₹52,912.50 on sales of ₹3,75,000 @ 14.11 per cent.
You are required to explain the income differences to the manager by using contribution based income statement.

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Particulars Sales revenue Cost of sales Gross profit January February 4,50,000 *3,75,000 1,80,000 1,50,000 2,70,000 2,25,000 Operating expenses: Rent 6,000 6,000 Salaries, wages, commissions 1,57,500 1,42,500 Property insurance, taxes, etc. 4,500 4,500 Supplies 9,000 7,500 Miscellaneous 29,500 29,500 Total 2,06,500 1,90,000 Operating profit Return on sales (per cent) 63,500 35,000 14.11 9.33