Question

The Central Valley Company is a merchandising firm that sells a single product. The company's revenues and expenses for the last three months are given below:

	April		May		June
Sales in units .................................	4,500		5,250		6,000
Sales revenue ...............................	$630,000		$735,000		$840,000
Less cost of goods sold ………..........	252,000		294,000		336,000
Gross Margin ................................	378,000		441,000		504,000
Less operating expenses:
Shipping expense ………..............	56,000		63,500		71,000
Advertising expense ………..........	70,000		70,000		70,000
Salaries and commissions ..........	143,000		161,750		180,500
Insurance expense ....................	9,000		9,000		9,000
Depreciation expense ...............	42,000		42,000		42,000
Total operating expenses ……..	320,000		346,250		372,500
Net income .......................	$58,000		$94,750		$131,500

Required:

Determine which expenses are mixed (show computations) and, by use of the high-low method, separate each mixed expense into its variable and fixed components. State the cost formula for each mixed expense.

Compute the company's total contribution margin (Sales – Variable Costs) for May.

Answer 1

the expense which increases proportionately with increse in sales will be a variable expense.

the expense which remains fixed irrespective of units sold will be fixed expense.

the expense which increases but not in proportion with increase in sales units will be mixed expense.

the following table shows the required classification:

expense	total amount in april for 4500 units	average cost per unit based on april sale	estimated expenditure in may based on average cost per unit	actual expense amount in may	classification of expense	cost formula if mixed expense (refer working note below)
cost of goods sold	252,000	252,000/4500=>$56	56*5250=>294,000	294,000	variable	not required
shipping expense	56,000	56,000/4500=>12.44	12.44*5250=>65,310	63,500	mixed	$11,000+ $10x
advertising expense	70,000	not required	not required	70,000	fixed	not required
salaries and commissions	143,000	143,000/4500=>31.77	31.77*5250=>166,833	161,750	mixed	$30,500+$25x

note:

for high low method =april is the lowest point month, june is the highest poiint month.

shipping expense is a mixed expense.

using highlow method the variable porition will be

=> (expense in high month - expense in low month) / (sale in high month - sale in low month)

=>(71000-56000) / (6000-4500)

=>15,000 / 1500

=>$10 per unit.

fixed portion of shipping expense:

consider may expense =>56,000

out of this 56,000 total expense ($10 per unit * 4500 units) =>$45,000 is variable portion.

=>fixed portion = $56,000 - 45,000=>$11,000.

so the cost formula

=.$11,000 + $10x................(where x is the unit sold).

now,

consider salaries and commissions.

variable portion using highlow method = (180,500 - 143,000) / (6000-4500)

=>$37,500 / 1500

=>$25. per unit.

consider salaries and commissions of may

=>$143,000

out of 143,000 , ($25 * 4500 units) =>112,500 is variable portion.

=>fixed portion = 143,000 - 112,500 =>$30,500.

so cost formula for salaries and wages is = $30,500 + $25x.

2nd requirement:

calculation of total contrubution margin for may:

sales		735,000
less: cost of goods sold ($56*5250)	(294,000)
less:variable shippin expense ($10*5250)	(52,500)
less:variable salaries and commissions ($25*5250)	(131,250)
		(477,750)
contribution		$257,250