Frankel
Ltd., a British merchandising company, is the exclusive distributor of a
product that is gaining rapid market acceptance.
P2-18
Cost Behavior: High-Low Method; C/M
Format Income Statement
P2-18
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 £.)
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 C/M format.
SOLUTION
PREVIEW
Analysis
of the mixed expenses:
|
|
Units
|
Shipping
Expense
|
Salaries
$
Comm.
Exp
|
|
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
|
|
|
Correct!
|
Correct!
|
Correct!
|
