Question

Arnall Ltd., a British merchandising company, is the exclusive distributor of a product that is gaining rapid market acceptance. The company’s revenues and expenses (in British pounds) for the last three months are given below:

  

Arnall Ltd. Comparative Income Statements For the Three Months Ended June 30
		April				May			June
Sales in units		1,100				4,300			5,900
Sales revenue		£ 209,000				£ 817,000			£ 1,121,000
Cost of goods sold		100,100				391,300			536,900
Gross margin		108,900				425,700			584,100
Selling and administrative expenses:
Shipping expense		29,900				74,700			97,100
Advertising expense		41,000				41,000			41,000
Salaries and commissions		95,000				255,000			335,000
Insurance expense		6,700				6,700			6,700
Depreciation expense		45,900				45,900			45,900
Total selling and administrative expenses		218,500				423,300			525,700
Net operating income (loss)		£ (109,600)				£ 2,400			£ 58,400

(Note: Arnall Ltd.’s income statement has been recast in the functional format common in the United States. The British currency is the pound, denoted by £.)

  

Required:
1.	Identify each of the company’s expenses (including cost of goods sold) as either variable, fixed, or mixed.

  

2.	Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense. (Enter mixed expenses in the order of company expenses provided under question.)

     

      

3.	Redo the company’s income statement at the 5,900-unit level of activity using the contribution format.

Answer 1

1)	Expenses
	Cost of goods sold			Variable
	Shipping expense			Mixed
	Advertising expense			Fixed
	Salaries & Commission			Mixed
	Insurance Expense			Fixed
	Depreciation expense			Fixed
				Variable		Fixed		Formula
2)				cost		cost
	Shipping expense			14	per unit	14,500	Y=	14,500	+	14x
	Salaries & Commission			50	per unit	40,000	Y=	40,000	+	50X
					units	Expenses
	high				5,900	97,100
	low				1,100	29,900
	Change				4,800	67,200
		Variable cost per unit =			67200/4800
					14	per unit
		Fixed cost		97100-5900*14
				14500
					units	Expenses
	high				5,900	335,000
	low				1,100	95,000
	Change				4,800	240,000
		Variable cost per unit =			240,000/4800
					50	per unit
		Fixed cost		335,000-5900*50
				40000
3)		Income Statement
	Sales revenue						1,121,000
	Variable expense
	Cost of goods sold					536,900
	shipping expense					82600
	Salaries and commission expense					295000
	total variable expense						914,500
	Contribution margin						206,500
	Fixed expenses:
	Shipping expense					14,500
	Advertising expense					41,000
	Salaries and commission expense					40,000
	Insurance					6,700
	Depreciation					45,900
	Total fixed expenses						148,100
	Net Operating income						58,400