Question

Problem 1

Haram Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $182.10 per unit.

                                                                                   Year 1                Year 2                 Year 3

Sales volume (units)                                             60,000                         80,000             110,000

Sales                                                                      $2,100,000             $2,800,000           $3,850,000

Expenses:

Cost of Goods Sold                                             (840,000)        (1,120,000)        (1,540,000)

Salaries                                                                     (520,000)             (680,000)            (920,000)

Rent                                                                          (50,000)              ( 50,000)           (   50,000)

Commissions                                                          (70,560)             (94,080)          (129,860)

Administrative                                                  (504,800)                  (656,400)           (883,800)

Net Operating Income                                             $164,640                $199,520           $326,340

Required C: Break out each YEAR 3 cost item into its VARIABLE and FIXED cost amounts.    All amounts must be shown in dollars and present in TOTAL AMOUNTS.

Using the High/Low Method provide all supporting calculations for all mixed cost amounts.

                        Total                    Variable Cost                     Fixed Cost

Cost of Sales (1,540,000)                                                                                        

Salaries        (920,000)                                                                                            

Rent             (50,000)                                                                                            

Commissions   (129,860)                                                                                                           

Administrative (883,800)                                                                                            

Requirement D: Prepare a Year 3 Traditional Income Statement. Label all items in proper order and show correct amounts to receive full credit.

Requirement E: Prepare a Year 3 Contribution Margin Income Statement. Label all items in proper order and show correct amounts to receive full credit.

Required F: Now Assume that Haram Corporation sells ZERO units in Year 3. Provide their Year 3 Net Income (Loss) amount.

Year 3 Net Income (Loss):                                                                                                                           

Answer 1

C.                                                                        

	Total	Variable Cost	Fixed Cost
Cost of Sales	1,540,000	1540000	0
Salaries	920,000	880000	40000
Rent	50,000	0	50000
Commissions	129,860	129860	0
Administrative	883,800	833800	50000

* here rent is Fixed cost because within the range the fixed cost did not changed, each year the amount of rent are same

* cost of sale is variable cost, because, it is changed year by year based on truly per units, per units cost of sales in each year are same

Year one = 840000 / 60000 = 14

Year 2 = 1120000 / 80000 = 14

Year 3 = 1540000 / 110000 = 14

* Commission also variable cost

*all other cost are mixed cost, include variable portion and fixed portions.

We can calculate variable and fixed portion using High low method

Under High low method

Y = a + bx

Where,

Y = total mixed cost

A = Fixed cost

B = variable cost per units

X = activity level ( units )

.

And here we first solve b ( variable cost per units )

B = ( cost @ highest level - cost @ lowest level ) / ( highest level - lowest level)

.

Salaries

Y = a + bx

Where,

Y = total mixed cost = 920000

A = Fixed cost = ?

B = variable cost per units = ? =

X = activity level = 110000 units

.

cost @ highest level = 920000

highest level = 110000

cost @ lowest level = 520000

lowest level = 60000

.

B = ( 920000 - 520000 ) / ( 110000 - 60000 )

B = 400000 / 50000 = 8

Variable cost per units = 8

Total variable cost (bx) = 8 * 110000 = 880000

.

A = y - bx, A = fixed cost

Fixed cost = 920000 - 8 * 110000

Fixed cost = 920000 - 880000 = 40000

*the fixed cost = 40000

.

.

Administrative

Y = a + bx

Where,

Y = total mixed cost = 883800

A = Fixed cost = ?

B = variable cost per units = ? =

X = activity level = 110000 units

.

cost @ highest level = 883800

highest level = 110000

cost @ lowest level = 504800

lowest level = 60000

.

B = ( 883800 - 504800 ) / ( 110000 - 60000 )

B = 379000 / 50000 = 7.58

Variable cost per units = 7.58

Total variable cost (bx) = 7.58* 110000 = 833800

.

A = y - bx, A = fixed cost

Fixed cost = 883800 - 7.58 * 110000

Fixed cost = 883800 - 833800 = 50000

*the fixed cost = 50000

.

D.   

Prepare a Year 3 Traditional Income Statement

.

Haram Corporation

Income statement

As year 3

Sales	$3850000
Cost of Goods Sold	1540000
Gross profit	$2310000
Operating expenses
Salaries	920000
Rent	50000
Commissions	129860
Administrative	883800
Operating profit	$326340

.

E: Prepare a Year 3 Contribution Margin Income Statement.

.

Haram Corporation

Income statement

As year 3

Sales	$3850000
Variable cost:
Cost of Goods Sold	1540000
Salaries	880000
Commission	129860
Administrative	833800
Contribution margin	$466340
Fixed cost:
Salaries	40000
Rent	50000
Administrative	50000
Operating profit	$326340

.

E. Now Assume that Haram Corporation sells ZERO units in Year Provide their Year 3 Net Income (Loss) amount.

.

If there is no sales in any year the contribution margin is zero, but the fixed cost are still exist, so the loss,

.

Year 3 Net Income (Loss):

Fixed cost:
Salaries	40000
Rent	50000
Administrative	50000
Net Loss	$140000