Question

Lies Inc. prepared the following report for the first quarter of this year:

Sales (2,500 units @ $2,800 per unit)		$7,000,000
Less: Cost of Goods sold		$3,840,000
Gross Margin		$3,160,000
Less:
Selling Expense	$1,024,000
Administrative Expense	$1,000,00	$2,024,000
Income		$1,136,000

Lie’s controller, Billy Baroo, studied the costs in detail, particularly focusing on cost behaviour. Her analysis revealed the following:

• Sixty-five percent of the cost of goods sold was variable with respect to the number of units.
• Of the selling expenses, $800,000 was fixed; the remaining was variable with respect to the number of units.
• All of the administrative expenses were fixed.

Required:

1. Express the cost of goods sold and the selling expenses in terms of cost equations. Hint: y=ax+b
2. Redo the above income statement using a contribution margin approach.

Answer 1

Cost ofg goods sold:			38,40,000
Less: variable portion (65% of 3840,000)	2496000
Fixed portion of COGS		13,44,000
Variable cost per unit (2496000/2500)	998.40
COGS = 1344,000 + 998.40x
Selling expenses			1024000
Less: Fixed			800000
variable portion			224000
Divide: Units			2500
Variable portion per unit		89.6
Selling expense = 800,000 + 89.60x
Contribution Margin Income Statemetn
Revenue (2500*2800)		70,00,000
Less: Variable cost
COGS (998.40*2500)		2496000
Selling expense (89.60*2500)	224000
Total Variable cost			2720000
Contribution margin		42,80,000
Less: Fixed cost
COGS			1344000
Selling expenses		800000
Admin expense		1000000
Total Fixed cost			3144000
Net Income			11,36,000