The Fun Store, Inc., purchases very large and heavy toys from a large

P5-15 The Fun Store, Inc., purchases very large and heavy toys from a large manufacturer and sells them at the retail level. The toys cost, on the average, $9 each from the manufacturer. The Fun Store, Inc., sells the toys to its customers at an average price of $40 each. The selling and administrative costs that the company incurs in a typical month are presented below:

	Costs	Cost Formula
	Selling:
	Advertising........................................	$1,000	per month
	Sales salaries and commissions....	$800	per month, plus 5% of sales
	Delivery of toys to customers........	$6	per toy sold
	Utilities...............................................	$700	per month
	Depreciation of sales facilities.......	$900	per month
	Administrative:
	Executive salaries............................	$3,500	per month
	Insurance..........................................	$500	per month
	Clerical...............................................	$500	per month, plus $5 per toy sold
	Depreciation of office equipment	$600	per month

During June, The Fun Store, Inc., sold and delivered 450 toys.

Required:

  1.   Prepare an income statement for The Fun Store, Inc., for June. Use the traditional format, with costs organized by function.

  2.   Redo (1) above, this time using the contribution format, with costs organized by behavior. Show costs and revenues on both a total and a per unit basis down through contribution margin.

  3.   Refer to the income statement you prepared in (2) above. Why might it be misleading to show the fixed costs on a per unit basis?

CHECK FIGURE

(1) Net income is $(400)

TUTORIAL PREVIEW

	THE FUN STORE INC Income statement For the month of October
Sales			$18,000
Cost of goods sold			4,050
Gross margin		`	13,950

Compania Maritima S.A., of Santiago de Chile is a merchandising company

P5-20 Compania Maritima S.A., of Santiago de Chile is a merchandising company that supplies a variety of American products to the Chilean market. The company’s income statements for the three most recent months follow:

	Compania Maritima S.A. Income Statements For the Three Months Ending June 30
		April	May	June
	Sales in units.......................................................	6,500	7,400	7,000
	Sales revenue......................................................	P260,000	P296,000	P280,000
	Cost of goods sold.............................................	78,000	88,800	84,000
	Gross margin.......................................................	182,000	207,200	196,000
	Selling and administrative expenses:
	Advertising expense......................................	5,000	5,000	5,000
	Shipping expense...........................................	67,500	75,600	72,000
	Salaries and commissions............................	30,800	34,400	32,800
	Insurance expense.........................................	4,000	4,000	4,000
	Depreciation expense....................................	2,500	2,500	2,500
	Total selling and administrative expenses....	109,800	121,500	116,300
	Net operating income........................................	P  72,200	P  85,700	P  79,700

(Note: Compania Maritima S.A.’s Chilean-formatted income statement has been recast in the format common in the United States. The Chilean dollar is denoted by P.)

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 7,000-unit level of activity using the contribution format.

CHECK FIGURE

(2) Shipping: P9,000 per month plus P9.00 per unit

TUTORIAL PREVIEW

Analysis of the mixed costs	Units	Shipping expense	Salaries and Commission expense
High activity level	7,400	P 75,600	P 34,400
Low activity level	6,500	67,500	30,800
change
	Correct!	Correct!	Correct!

File name: P5-20 Compania Martima.xls    File type: xls  PRICE: $9

Carlyle Company manufactures a single product. The company keeps careful

Carlyle Company manufactures a single product. 

P5-22 High-Low Method; Cost of Goods Manufactured (LO1, LO3)

P5-22 Carlyle Company manufactures a single product. The company keeps careful records of manufacturing activities from which the following information has been extracted:

	Level of Activity
	January–Low	April–High
Number of units produced	12,000	15,000
Cost of goods manufactured	$250,000	$300,000
Work in process inventory, beginning	$5,000	$16,000
Work in process inventory, ending	$6,000	$9,000
Direct materials cost per unit	$4.00	$4.00
Direct labor cost per unit	$8.00	$8.00
Manufacturing overhead cost, total	?	?

The company’s manufacturing overhead cost consists of both variable and fixed cost elements. To have data available for planning, management wants to determine how much of the overhead cost is variable with units produced and how much of it is fixed per month.

Required:

1. For both January and April, estimate the amount of manufacturing overhead cost added to production. The company had no underapplied or overapplied overhead in either month. (Hint: A useful way to proceed might be to construct a schedule of cost of goods manufactured.)

2. Using the high-low method, estimate a cost formula for manufacturing overhead. Express the variable portion of the formula in terms of a variable rate per unit of product.

3. If 13,500 units are produced during a month, what would the cost of goods manufactured be? (Assume that work in process inventories do not change and that overhead cost is neither underapplied nor overapplied for the month.)

CHECK FIGURE: (2) $74,700 per month plus $9.90 per unit

SOLUTION PREVIEW

    CARLYLE COMPANY

Cost of Goods manufactured

(1)

	January Low 12,000	April High 15,000
Direct materials cost @ $4.00 p.u.	$    48,000	$     60,000
Direct labor cost @ $8.00 p.u.	96,000	120,000
Manufacturing overhead costs	107,000	113,000

File name: P5-22 CARLYLE COMPANY.xlxs   File type: xlxs PRICE: $8