Maurice Tutor
$15/per page/Negotiable
Cost Behavior; High-Low Method; Contribution Format Income Statement
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:
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|
 |
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 |
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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.
3.      Redo the company’s income statement at the 4,500-unit level of activity using the contribution format.