## Tuesday, 24 July 2012

### Frankel Ltd., a British merchandising company, is the exclusive distributor of a product that is

Frankel 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:

 Frankel Ltd. Comparative Income Statements For the Three Months Ended June 30 April May June Sales in units 3,000 3,750 4,500 Sales revenue £ 420, 000 £ 525,000 £ 630,000 Cost of goods sold 168,000 210,000 252,000 Gross margin 252,000 315,000 378,000 Selling and administrative expenses: Shipping expense 44,000 50,000 56,000 Advertising expense 70,000 70,000 70,000 Salaries and commissions 107,000 125,000 143,000 Insurance expense 9,000 9,000 9,000 Depreciation expense 42,000 42,000 42,000 Total selling and administrative expenses 272,000 296,000 320,000 Net operating income (loss) £  (20,000) £  19,000 £  58,000
 (Note: Frankel 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. (Omit the "£" sign in your response.)

 Variable Cost Fixed Cost Formula Shipping expense £ per unit £ Y = £ + £  X Salaries and commissions £ per unit £ Y = £ + £  X

 3 Redo the company’s income statement at the 4,500-unit level of activity using the contribution format. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "£" sign in your response.)

 Frankel Ltd. Income Statement For the Month Ended June 30 Sales revenue £ Variable expenses: Cost of goods sold £ Shipping expense Sales commissions Contribution margin Fixed expenses: Shipping expense Advertising expense Sales salaries Insurance expense Depreciation expense Net operating income £

Explanation: