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		2,500				5,600			7,300
Sales revenue		£ 500,000				£ 1,120,000			£ 1,460,000
Cost of goods sold		205,000				459,200			598,600
Gross margin		295,000				660,800			861,400
Selling and administrative expenses:
Shipping expense		43,700				80,900			101,300
Advertising expense		52,000				52,000			52,000
Salaries and commissions		148,000				296,800			378,400
Insurance expense		7,400				7,400			7,400
Depreciation expense		32,900				32,900			32,900
Total selling and administrative expenses		284,000				470,000			572,000
Net operating income (loss)		£ 11,000				£ 190,800			£ 289,400
Arnall Ltd. Comparative Income Statements For the Three Months Ended June 30 April May June   Sales in units 2,500 5,600 7,300   Sales revenue £ 500,000 £ 1,120,000   £ 1,460,000     Cost of goods sold 205,000 459,200 598,600   Gross margin 295,000 660,800 861,400   Selling and administrative expenses:        Shipping expense 43,700 80,900 101,300        Advertising expense 52,000 52,000 52,000        Salaries and commissions 148,000 296,800 378,400        Insurance expense 7,400 7,400 7,400        Depreciation expense 32,900 32,900 32,900   Total selling and administrative expenses 284,000 470,000 572,000   Net operating income (loss) £ 11,000 £ 190,800 £ 289,400

(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.
	Expenses Classification Cost of goods sold Variable Shipping expense Mixed Advertising expense Fixed Salaries and commissions Mixed Insurance expense Fixed Depreciation expense Fixed

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.

	Variable Cost Fixed Cost Formula per unit Y = + X per unit Y = + X

3.	Redo the company’s income statement at the 7,300-unit level of activity using the contribution format. Arnall Ltd. Income Statement For the Month Ended June 30 Sales revenue Variable expenses: Cost of goods sold Shipping expense Salaries and commission expense Total variable expenses 0 Contribution margin 0 Fixed expenses: Shipping expense Advertising expense Salaries and commission expense Insurance Depreciation Total fixed expenses 0 Net operating income £0

Answer 1

Answer to Part 2.

As per High-Low Method, Variable Cost per Unit = (y2 – y1) / (x2 – x1)

Shipping Expense:
Total Cost at the Highest Level of Activity (y2) = $101,300
Total Cost at the Lowest Level of Activity (y1) = $43,700
Number of Units at the Highest Level of Activity (x2) = 7,300 Units
Number of Units at the Lowest Level of Activity (x2) = 2,500 Units

Variable Cost per unit = (101,300 – 43,700) / (7,300 – 2,500)
Variable Cost per unit = 57,600 / 4,800
Variable Cost per unit = $12

Total Shipping Cost at the Highest Level of Activity = $101,300
$101,300 = ($12 * 7,300) + Fixed Cost
$101,300 = $87,600 + Fixed Cost
Fixed Cost = $13,700

Y = a + bx
y = $13,700 + $12x

Salaries and Commission Expense:
Total Cost at the Highest Level of Activity (y2) = $378,400
Total Cost at the Lowest Level of Activity (y1) = $148,000
Number of Units at the Highest Level of Activity (x2) = 7,300 Units
Number of Units at the Lowest Level of Activity (x2) = 2,500 Units

Variable Cost per unit = (378,400 – 148,000) / (7,300 – 2,500)
Variable Cost per unit = 230,400 / 4,800
Variable Cost per unit = $48

Total Shipping Cost at the Highest Level of Activity = $378,400
$378,400 = ($48 * 7,300) + Fixed Cost
$378,400 = $350,400 + Fixed Cost
Fixed Cost = $28,000

Y = a + bx
y = $28,000 + $48x