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