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