Question

1. In November, Mazoon company., a merchandising company, had sales of $294,000, selling expenses of $27,000, and administrative expenses of $35,000. The cost of merchandise purchased during the month was $211,000. The beginning balance in the merchandise inventory account was $38,000 and the ending balance was $34,000.

Required:

Prepare a traditional format income statement for November.

2. Majan company shared the following data for a number of recent months:

Products Return

April 24 $2,972

May 23 $2,928

June 27 $3,141

July 39    $3,752

August 36   $3,569

September 35 $3,551

October   26 $3,071

November 37 $3,636

Required:
Estimate the variable cost per product return and the fixed cost per month using high-low method

Answer 1

Answer-1)-

MAZOON COMMPANY
TRADITIONAL INCOME STATEMENT
FOR THE MONTH OF NOVEMBER
PARTICULARS	AMOUNT	AMOUNT
	$	$
Net sales		294000
Less- Cost of goods sold		215000
Beginning merchandise inventory	38000
Add- Cost of merchandise purchased	211000
Less-Ending merchandise inventory	34000
Gross profit		79000
Less- Operating expenses		62000
Selling expenses	27000
Administrative expenses	35000
Net operating income		17000

Answer- 2)-Variable Cost per product return = $51.50 per product return.

Total fixed costs = $1743.50.

Explanation:-High-Low Method:-

Variable Cost per Unit

Variable cost per unit (b) is calculated using the following formula:

Variable cost per unit = (Y2-Y1)/(X2-X1)

Where,                        
y2 is the total cost at highest level of activity;
y1 is the total cost at lowest level of activity;
x2 are the number of units/miles/ labor ,machine hours etc. at highest level of activity; and
x1 are the number of units/miles/ labor, machine hours etc. at lowest level of activity

The variable cost per unit is equal to the slope of the cost volume line (i.e. change in total cost ÷ change in number of machine hours).

Total Fixed Cost

Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:

Total Fixed Cost = (y2 – b)*x2 = (y1 – b*x1)

We have,
at highest activity: x₂ = 39 product return; y₂ = $3752
at lowest activity: x₁ = 23 product return; y₁ = $2928

Variable Cost per product return = ($3752 - $2928) /(39 products return - 23 products return)  

= $824/16 products return

= $51.50 per product return

Fixed costs = $3752 - ($51.50 per product return*39 products return)

= $3752 - $2008.50

= $1743.50