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

(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

Ques 1
Cost of goods sold	Variable	this depends on the no. of units sold
Shipping expense	mixed	this has both variable and fixed component
Advertising expense	fixed	these expenses remain same throught the three months
Salaries and commissions	mixed	this has both variable and fixed component
Insurance expense	fixed	these expenses remain same throught the three months
Depreciation expense	fixed
Ques 2
	Units	Shipping expense	Salaries and comm.
High level of activity	5,900	£                                                  74,100	£        277,800
low level of activity	1,900	£                                                  34,100	£        109,800
Change	4,000	40,000	168,000
variable cost element
variable cost per unit=change in cost/change in activity
shipping expense=40000/4000=	10
salaries & comm=168000/4000	42
Fixed cost elememt
	Shipping expense	Salaries and comm.
Total costs	£         74,100	£                                                277,800
Less:variable costs
(5900*10/5900*42)	59,000	247,800
fixed costs	15,100	30,000
so the equation comes to be
shipping expense=15100+10X
sales & comm. = 30000+42X
Ques 3
Income statement
Sales revenue		£                                            1,003,000
Variable expense
cost of goods sold	£      418,900
shipping expense	59,000
salaries and comm.	247,800
total variable expenses		£                                                725,700
contribution margin		£                                                277,300
Fixed expenses
Shipping expense	15,100
Advertising expense	£         58,000
Salaries and commissions	30,000
Insurance expense	£           7,200
Depreciation expense	£         48,000
total fixed expenses		158300
net operating income		£                                                119,000