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		1,900				4,900			5,900
Sales revenue		£ 323,000				£ 833,000			£ 1,003,000
Cost of goods sold		134,900				347,900			418,900
Gross margin		188,100				485,100			584,100
Selling and administrative expenses:
Shipping expense		34,100				64,100			74,100
Advertising expense		58,000				58,000			58,000
Salaries and commissions		109,800				235,800			277,800
Insurance expense		7,200				7,200			7,200
Depreciation expense		48,000				48,000			48,000
Total selling and administrative expenses		257,100				413,100			465,100
Net operating income (loss)		£ (69,000)				£ 72,000			£ 119,000

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 5,900-unit level of activity using the contribution format.

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.)

     

      

Answer 1

2

Shipping expenses:

Variable part=( expenses at high level- expense at low level)/(High level-Low level)=(74100-34100)/(5900-1900)=£ 10 per unit

Fixed part=34100-(1900*10)=15100

Formula, Y=15100+10X

Y=Total expenses

X=Units sold

Salaries and commissions:

Variable part=( expenses at high level- expense at low level)/(High level-Low level)=(277800-109800)/(5900-1900)=£ 42 per unit

Fixed part=109800-(1900*42)=30000

Formula, Y=30000+42X

Y=Total expenses

X=Units sold

3

Income statement:

Sales revenue

1003000

Less: Variable expenses

Cost of goods sold

418900

Shipping expenses

(10*5900)

59000

Salaries and commissions

(42*5900)

247800

725700

Contribution margin

277300

Less: Fixed expenses

Shipping expenses

15100

Advertising expenses

58000

Salaries and commissions

30000

Insurance expense

7200

Depreciation expense

48000

158300

Net operating income

119000