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Thursday, 27 June 2013

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., 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: 2. 
Analysis of the mixed expenses:

  Units Shipping
Expense
Salaries and Commissions
  High level of activity    4,500     £56,000     £143,000  
  Low level of activity    3,000  
   44,000
    107,000
 


  Change    1,500  
 £12,000
   £ 36,000
 






   
Variable cost element:

Variable cost per unit  =
Change in cost
Change in activity  

Shipping expense:
=
£12,000
 = £8 per unit
1,500 units

Salaries and commissions:
£36,000
  = £24 per unit
1,500 units

Fixed cost element:

  Shipping Expense   Salaries and Commissions
  Cost at high level of activity £ 56,000       £ 143,000   
  Less variable cost element:          
      4,500 units × £8 per unit   36,000          
      4,500 units × £24 per unit  
    108,000  
 

 

  Fixed cost element £ 20,000   
  £ 35,000  
 



 





The cost formulas are:
Shipping expense: £20,000 per month plus £8 per unit or
  Y = £20,000 + £8X.
 
Salaries and Commissions: £35,000 per month plus £24 per unit or
  Y = £35,000 + £24X.

3.
Cost of goods sold: (4,500 units × £56 per unit) = £252,000
Shipping expense: (4,500 units × £8 per unit) = £36,000
Sales commissions: (4,500 units × £24 per unit) = £108,000