Question

2) The Central Valley Company is a merchandising firm that sells a single product. The company's revenues and expenses for the last three months are given below:

	Central Valley Company Comparative Income Statement For the Second Quarter
	April	May	June
Sales in units	4,500	5,250	6,000
Sales Revenue	$630,000	$735,000	$840,000
Less cost of goods sold	252,000	294,000	336,000
Gross Margin	$378,000	$441,000	$504,000
Less operating expense
Shipping expense	56,000	63,500	71,000
Advertising expense	70,000	70,000	70,000
Salary & Commissions	143,000	161,750	180,500
Insurance expense	9,000	9,000	9,000
Depreciation expense	42,000	42,000	42,000
Total expense	$320,000	$346,250	$372,500
Net Income	$58,000	$94,750	$131,500

Required:

a. Determine which expenses are mixed and, by use of the high-low method, separate each mixed expense into its variable and fixed components. State the cost formula for each mixed expense.

b. Compute the company's total contribution margin for May.

Answer 1

a) There are two mixed expenses, Shipping expense and salaries and commission expenses.

Shipping expense:

Variable expense per unit = Change in costs/Change in units

= ($71,000-$56,000)/(6,000-4,500)

= $15,000/1,500 = $10

Variable expense per unit = $10

Fixed expenses per month = $56,000-(4,500*$10)

Fixed expenses = $11,000

Cost formula:

y = 10x + 11,000

Salaries and commission expenses:

Variable expense per unit = ($180,500-$143,000)/(6,000-4,500)

= $37,500/1,500

= $25

Variable expense per unit = $25

Fixed expenses per month = $143,000 - (4,500*$25)

Fixed expenses = $30,500

Cost formula:

y = 25x + 30,500

b)

Particulars	Workings	May
Units sold		5,250
Sales		$735,000
Less: Variable costs
Cost of goods sold	(5,250*$56)	$294,000
Shipping expense	(5,250*$10)	$52,500
Salaries and commission expense	(5,250*$25)	$131,250
Total contribution margin		$257,250

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